Vol. 78 Friday, 

No. 144 July 26, 2013 

Part II 

Commodity Futures Trading Commission 

17 CFR Chapter I 

Interpretive Guidance and Policy Statement Regarding Compliance With 

Certain Swap Regulations; Rule 

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45292 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Chapter I 

RIN 3038–AD85 

Interpretive Guidance and Policy 

Statement Regarding Compliance With 

Certain Swap Regulations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Interpretive Guidance and 

Policy Statement. 

SUMMARY: On July 12, 2012, the 

Commodity Futures Trading 

Commission (‘‘Commission’’ or 

‘‘CFTC’’) published for public comment 

its proposed interpretive guidance and 

policy statement (‘‘Proposed Guidance’’) 

regarding the cross-border application of 

the swaps provisions of the Commodity 

Exchange Act (‘‘CEA’’), as added by 

Title VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’ or ‘‘Dodd-Frank’’). 

On December 21, 2012, the Commission 

also proposed further guidance on 

certain aspects of the Proposed 

Guidance (‘‘Further Proposed 

Guidance’’). 

The Commission has determined to 

finalize the Proposed Guidance with 

certain modifications and clarifications 

to address public comments. The 

Commission’s Interpretive Guidance 

and Policy Statement (‘‘Guidance’’) 

addresses the scope of the term ‘‘U.S. 

person,’’ the general framework for 

swap dealer and major swap participant 

registration determinations (including 

the aggregation requirement applicable 

to the de minimis calculation with 

respect to swap dealers), the treatment 

of swaps involving certain foreign 

branches of U.S. banks, the treatment of 

swaps involving a non-U.S. 

counterparty guaranteed by a U.S. 

person or ‘‘affiliate conduit,’’ and the 

categorization of the Dodd-Frank swaps 

provisions as ‘‘Entity-Level 

Requirements’’ or ‘‘Transaction-Level 

Requirements.’’ 

DATES: Effective Date: This Guidance 

will become effective July 26, 2013. 

FOR FURTHER INFORMATION CONTACT: Gary 

Barnett, Director, Division of Swap 

Dealer and Intermediary Oversight, 

(202) 418–5977, gbarnett@cftc.gov; 

Sarah E. Josephson, Director, Office of 

International Affairs, (202) 418–5684, 

sjosephson@cftc.gov; Mark Fajfar, 

Assistant General Counsel, Office of 

General Counsel, (202) 418–6636, 

mfajfar@cftc.gov; Laura B. Badian, 

Counsel, Office of General Counsel, 

(202) 418–5969, lbadian@cftc.gov; 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

A. The Dodd-Frank Wall Street Reform and 

Consumer Protection Act 

B. The Proposed Guidance and Further 

Proposed Guidance 

II. Scope of This Guidance 

III. Interpretation of Section 2(i) 

A. Comments 

B. Statutory Analysis 

C. Principles of International Comity 

IV. Guidance 

A. Interpretation of the Term ‘‘U.S. Person’’ 

1. Proposed Interpretation 

2. Comments 

a. Phase-In Interpretation 

b. Comments on Particular Prongs of the 

Proposed Interpretation of the Term 

‘‘U.S. Person’’ 

c. Commenters’ Proposed Alternatives 

d. Due Diligence 

e. Non-U.S. Person That Is Affiliated, 

Guaranteed, or Controlled by U.S. Person 

f. Foreign Branch of U.S. Person 

g. Regulation S 

h. Other Clarifications 

3. Commission Guidance 

a. Due Diligence 

b. Foreign Branch of U.S. Person 

c. Regulation S 

d. Other Clarifications 

4. Summary 

B. Registration 

1. Proposed Guidance 

2. Comments 

3. Commission Guidance 

a. Registration Thresholds for U.S. Persons 

and Non-U.S. Persons, Including Those 

Guaranteed by U.S. Persons 

b. Aggregation 

c. Exclusion of Certain Swaps by Non-U.S. 

Persons From the Swap Dealer De 

Minimis Threshold 

d. Exclusion of Certain Swaps by Non-U.S. 

Persons From the MSP Calculation 

e. Exclusion of Certain Swaps Executed 

Anonymously on a SEF, DCM, or Foreign 

Board of Trade (‘‘FBOT’’) and Cleared 

f. MSP-Parent Guarantees 

4. Summary 

C. Interpretation of the Term ‘‘Foreign 

Branch;’’ When a Swap Should Be 

Considered To Be With the Foreign 

Branch of a U.S. Person That Is a Swap 

Dealer or MSP 

1. Interpretation of the Term ‘‘Foreign 

Branch’’ and Treatment of Foreign 

Branches 

2. Comments 

3. Commission Guidance 

a. Scope of the Term ‘‘Foreign Branch’’ 

b. Commission Consideration of Whether a 

Swap Is With a Foreign Branch of a U.S. 

Bank 

D. Description of the Entity-Level and 

Transaction-Level Requirements 

1. Description of the Entity-Level 

Requirements 

a. First Category of Entity-Level 

Requirements 

i. Capital Adequacy 

ii. Chief Compliance Officer 

iii. Risk Management 

iv. Swap Data Recordkeeping (Except 

Certain Aspects of Swap Data 

Recordkeeping Relating to Complaints 

and Sales Materials) 

b. Second Category of Entity-Level 

Requirements 

i. SDR Reporting 

ii. Swap Data Recordkeeping Relating to 

Complaints and Marketing and Sales 

Materials 

iii. Physical Commodity Large Swaps 

Trader Reporting (Large Trader 

Reporting) 

2. Description of the Transaction-Level 

Requirements 

a. Category A: Risk Mitigation and 

Transparency 

i. Required Clearing and Swap Processing 

ii. Margin and Segregation Requirements 

for Uncleared Swaps 

iii. Trade Execution 

iv. Swap Trading Relationship 

Documentation 

v. Portfolio Reconciliation and 

Compression 

vi. Real-Time Public Reporting 

vii. Trade Confirmation 

viii. Daily Trading Records 

b. Category B: External Business Conduct 

Standards 

E. Categorization of Entity-Level and 

Transaction-Level Requirements 

1. Categorization Under the Proposed 

Guidance 

2. Comments 

a. Reporting and Trade-Execution 

Requirements 

b. Swap Trading Relationship 

Documentation, Portfolio Reconciliation 

and Compression, Daily Trading Records 

and External Business Conduct 

Standards 

c. Internal Conflicts of Interest 

Requirement 

d. Position Limits and Anti-Manipulation 

Rules 

3. Commission Guidance 

a. Entity-Level Requirements 

i. The First Category—Capital Adequacy, 

Chief Compliance Officer, Risk 

Management, and Swap Data 

Recordkeeping (Except for Certain 

Recordkeeping Requirements) 

ii. The Second Category—SDR Reporting, 

Certain Swap Data Recordkeeping 

Requirements and Large Trader 

Reporting 

b. Transaction-Level Requirements 

i. The Category A Transaction-Level 

Requirements 

ii. The Category B Transaction-Level 

Requirements (External Business 

Conduct Standards) 

F. Substituted Compliance 

1. Proposed Guidance 

2. Comments 

3. Overview of the Substituted Compliance 

Regime 

4. Process for Comparability 

Determinations 

5. Conflicts Arising Under Privacy and 

Blocking Laws 

6. Clearing 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45293 

1Public Law 111–203, 124 Stat. 1376 (2010). The 

text of the Dodd-Frank Act may be accessed at 

http://www.cftc.gov/LawRegulation/OTCDERI

VATIVES/index.htm. 

2For purposes of this Guidance, the term ‘‘swap 

dealer’’ means any swap dealer registered with the 

Commission. Similarly, the term ‘‘MSP’’ means any 

MSP registered with the Commission. 

3 7 U.S.C. 2(i). 

4 Id. Section 2(i) of the CEA states that the 

provisions of the Act relating to swaps that were 

enacted by the Wall Street Transparency and 

Accountability Act of 2010 (including any rule 

prescribed or regulation promulgated under that 

Act), shall not apply to activities outside the United 

States unless those activities have a direct and 

significant connection with activities in, or effect 

on, commerce of the United States; or contravene 

such rules or regulations as the Commission may 

prescribe or promulgate as are necessary or 

appropriate to prevent the evasion of any provision 

of this Act that was enacted by the Wall Street 

Transparency and Accountability Act of 2010. 

5See, e.g., Congressional Oversight Panel, June 

Oversight Report, The AIG Rescue, Its Impact on 

Markets, and the Government’s Exit Strategy, (Jun. 

10, 2010), available at http://www.gpo.gov/fdsys/

pkg/CPRT–111JPRT56698/pdf/CPRT–111JPRT5

6698.pdf (‘‘AIG Report’’); Office of the Special 

Inspector General for the Troubled Asset Relief 

Program, Factors Affecting Efforts to Limit 

Payments to AIG Counterparties (Nov. 17, 2009), 

available at http://www.sigtarp.gov/Audit%20

Reports/Factors_Affecting_Efforts_to_Limit_

Payments_to_AIG_Counterparties.pdf. AIGFP was a 

Delaware corporation based in Connecticut that was 

an active participant in the credit default swap 

(‘‘CDS’’) market in the years leading up to the crisis. 

See id. at 23. AIGFP’s CDS activities benefited from 

credit support provided by another Delaware 

corporation, American International Group, Inc., 

AIGFP’s highly-rated parent company. Although 

both AIG and AIGFP were incorporated and 

headquartered in the U.S., much of AIGFP’s CDS 

business was conducted through its London office 

and involved non-U.S. counterparties and credit 

exposures. Id. at 18. See also Office of the Special 

Inspector General for the Troubled Asset Relief 

Program, Factors Affecting Efforts to Limit 

Payments to AIG Counterparties, at 20 (Nov. 17, 

2009) (listing AIGFP’s CDS counterparties, 

including a variety of U.S. and foreign financial 

institutions), available at: http://www.sigtarp.gov/

Audit%20Reports/Factors_Affecting_Efforts_to_

Limit_Payments_to_AIG_Counterparties.pdf. 

a. Clearing Venues 

b. Foreign End-Users 

G. Application of the Entity-Level and 

Transaction-Level Requirements To 

Swap Dealers and MSPs 

1. Comments 

2. Commission Guidance 

3. Application of the Entity-Level 

Requirements To Swap Dealers and 

MSPs the Commission’s policy on 

a. To U.S. Swap Dealers and MSPs 

b. To Non-U.S. Swap Dealers and MSPs 

4. Application of the ‘‘Category A’’ 

Transaction-Level Requirements To 

Swap Dealers and MSPs 

a. Swaps With U.S. Swap Dealers and 

MSPs 

b. Swaps With Non-U.S. Swap Dealers and 

Non-U.S. MSPs 

c. Swaps With a Non-U.S. Person 

Guaranteed by a U.S. Person 

i. Proposed Guidance 

ii. Comments 

iii. Commission Guidance 

d. Swaps With a Non-U.S. Person That Is 

an Affiliate Conduit 

i. Proposed Guidance 

ii. Comments 

iii. Commission Guidance 

5. Application of the ‘‘Category B’’ 

Transaction-Level Requirements To 

Swap Dealers and MSPs 

a. Swaps With U.S. Swap Dealers and U.S. 

MSPs 

b. Swaps With Foreign Branches of a U.S. 

Bank That Is a Swap Dealer or MSP 

c. Swaps With Non-U.S. Swap Dealers and 

Non-U.S. MSPs 

H. Application of the CEA’s Swap 

Provisions and Commission Regulations 

to Market Participants That Are Not 

Registered as a Swap Dealer or MSP 

1. Swaps Between Non-Registrants Where 

One or More of the Non-Registrants Is a 

U.S. Person 

2. Swaps between Non-Registrants That 

Are Both Non-U.S. Persons 

a. Large Trader Reporting 

b. Swaps Where Each of the Counterparties 

Is Either a Guaranteed or Conduit 

Affiliate 

c. Swaps Where Neither or Only One of the 

Parties Is a Guaranteed or Conduit 

Affiliate 

V. Appendix A—The Entity-Level 

Requirements 

A. First Category of Entity-Level 

Requirements 

1. Capital Adequacy 

2. Chief Compliance Officer 

3. Risk Management 

i. Swap Data Recordkeeping (Except 

Certain Aspects of Swap Data 

Recordkeeping Relating to Complaints 

and Sales Materials) 

B. Second Category of Entity-Level 

Requirements 

1. SDR Reporting 

2. Swap Data Recordkeeping Relating to 

Complaints and Marketing and Sales 

Materials 

3. Physical Commodity Large Swaps 

Trader Reporting (Large Trader 

Reporting) 

VI. Appendix B—The Transaction-Level 

Requirements 

A. Category A: Risk Mitigation and 

Transparency 

1. Required Clearing and Swap Processing 

2. Margin and Segregation Requirements 

for Uncleared Swaps 

3. Trade Execution 

4. Swap Trading Relationship 

Documentation 

5. Portfolio Reconciliation and 

Compression 

6. Real-Time Public Reporting 

7. Trade Confirmation 

8. Daily Trading Records 

B. Category B: External Business Conduct 

Standards 

VII. Appendix C—Application of the EntityLevel Requirements to Swap Dealers and 

MSPs* 

VIII. Appendix D—Application of the 

Category A Transaction-Level 

Requirements to Swap Dealers and 

MSPs* 

IX. Appendix E—Application of the Category 

B Transaction-Level Requirements to 

Swap Dealers and MSPs* 

X. Appendix F—Application of Certain 

Entity-Level and Transaction-Level 

Requirements to Non-Swap Dealer/NonMSP Market Participants* 

I. Introduction 

A. The Dodd-Frank Wall Street Reform 

and Consumer Protection Act 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act,1 Title VII of 

which amended the CEA to establish a 

new regulatory framework for swaps. 

The legislation was enacted to reduce 

systemic risk (including risk to the U.S. 

financial system created by 

interconnections in the swaps market), 

increase transparency, and promote 

market integrity within the financial 

system by, among other things: (1) 

Providing for the registration and 

comprehensive regulation of swap 

dealers 2 and major swap participants 

(each, an ‘‘MSP’’); (2) imposing clearing 

and trade execution requirements on 

standardized derivatives products; (3) 

creating rigorous recordkeeping and 

data reporting regimes with respect to 

swaps, including real-time public 

reporting; and (4) enhancing the 

Commission’s rulemaking and 

enforcement authorities over all 

registered entities, intermediaries, and 

swap counterparties subject to the 

Commission’s oversight. 

Section 722(d) of the Dodd-Frank Act 

amended the CEA by adding section 

2(i),3 which provides that the swaps 

provisions of the CEA (including any 

CEA rules or regulations) apply to crossborder activities when certain 

conditions are met, namely, when such 

activities have a ‘‘direct and significant 

connection with activities in, or effect 

on, commerce of the United States’’ or 

when they contravene Commission 

rules or regulations as are necessary or 

appropriate to prevent evasion of the 

swaps provisions of the CEA enacted 

under Title VII of the Dodd-Frank Act.4

The potential for cross-border 

activities to have a substantial impact 

on the U.S. financial system was 

apparent in the fall of 2008, when a 

series of large financial institutional 

failures threatened to freeze foreign and 

domestic credit markets. In September 

2008, for example, U.S.-regulated 

insurance company American 

International Group (‘‘AIG’’) nearly 

failed as a result of risk incurred by the 

London swap trading operations of its 

subsidiary AIG Financial Products 

(‘‘AIGFP’’).5 Enormous losses on credit 

default swaps entered into by AIGFP 

and guaranteed by AIG led to a credit 

downgrade for AIG, triggering massive 

collateral calls and an acute liquidity 

crisis for both entities. AIG only avoided 

default through more than $112.5 

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45294 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

6 ‘‘The global nature of the Lehman business with 

highly integrated, trading and non-trading 

relationships across the group led to a complex 

series of inter-company positions being outstanding 

at the date of Administration. There are over 300 

debtor and creditor balances between LBIE and its 

affiliates representing $10.5B of receivables and 

$11.0B of payables as of September 15 2008.’’ See 

Lehman Brothers International (Europe) in 

Administration, Joint Administrators’ Progress 

Report for the Period 15 September 2008 to 14 

March 2009 (Apr. 14, 2009) (‘‘Lehman Brothers 

Progress Report’’), available at http://www.pwc.co.

uk/en_uk/uk/assets/pdf/lbie-progress-report140409.pdf. 

7See In re Bear Sterns High-Grade Structured 

Credit Strategies Master Funds, Ltd., 374 B.R. 122 

(Bankr. S.D.N.Y. 2007), available at http://www.

nysb.uscourts.gov/opinions/brl/158971_25_

opinion.pdf. 

8See id. 

9See The President’s Working Group on 

Financial Markets, Hedge Funds, Leverage, and the 

Lessons of Long-Term Capital Management (April 

1999), available at http://www.treasury.gov/ 

resource-center/fin-mkts/Documents/hedgfund.pdf. 

10See id. at 13. 

11See id. at 17. 

12See Sen. Permanent Subcomm. on 

Investigations, 113th Cong., Majority and Minority 

Staff Report, JPMorgan Chase Whale Trades: A Case 

History of Derivatives Risks and Abuses (March 15, 

2013), available at http://www.levin.senate.gov/ 

download/?id=bfb5cd04-41dc-4e2d-a5e1- 

ab2b81abfaa8-2560k. See also Dodd-Frank 

Statement (‘‘[A]ny suggestion that U.S. financial 

entities learned enough from AIG’s devastating 

misjudgments are [sic] undercut by the multibillion dollar loss incurred by a bank generally 

considered to be among the most careful— 

J.P.Morgan Chase—in its London derivative 

trading.’’). 

13See Letter from Sen. Carl Levin, Chairman of 

the Permanent Subcommittee on Investigations at 4 

(Apr. 23, 2013) (‘‘Letter from Sen. Levin’’), available 

at http://www.levin.senate.gov/download/ 

levin_comment_letter_cftc_042313. See also CrossBorder Application of Certain Swaps Provisions of 

the Commodity Exchange Act, 77 FR 41214, 41216 

(Jul. 12, 2012) (‘‘Proposed Guidance’’). 

14Legislatures and regulators in a number of 

foreign jurisdictions are undertaking significant 

regulatory reforms over the swaps market and its 

participants. See CFTC and SEC, Joint Report on 

International Swap Regulation Required by Section 

719(c) of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act at 13 (Jan. 31, 2012), 

available at http://www.cftc.gov/ucm/groups/

public/@swaps/documents/file/dfstudy_isr_

013112.pdf. 

For example, the European Commission released 

a public consultation on revising the Markets in 

Financial Instruments Directive (‘‘MiFID’’) in 

December 2010. See ‘‘European Commission Public 

Consultation: Review of the Markets in Financial 

Instruments Directive’’ (Dec. 8, 2010), available at 

http://ec.europa.eu/internal_market/consultations/

docs/2010/mifid/consultation_paper_en.pdf. 

In October 2011, the European Commission 

released two public consultations, one to revise 

MiFID and the other for creating a new regulation 

entitled the Markets in Financial Instruments 

Regulation (‘‘MiFIR’’). See European Commission, 

Proposal for a Directive of the European Parliament 

and of the Council on markets in financial 

instruments repealing Directive 2004/39/EC of the 

European Parliament and of the Council, COM 

(2011) 656 final (Oct. 20, 2011), available at http:// 

ec.europa.eu/internal_market/securities/docs/isd/ 

mifid/COM_2011_656_en.pdf; European 

Commission, Proposal for a Regulation of the 

European Parliament and of the Council on markets 

in financial instruments and amending regulation 

[EMIR] on OTC derivatives, central counterparties 

and trade repositories, COM (2011) 652 final (Oct. 

20, 2011), available at http://ec.europa.eu/internal_

market/securities/docs/isd/mifid/COM_2011_652_

en.pdf. 

As of March 15, 2013, the majority of the 

regulatory technical standards (i.e., rulemakings) of 

the European Market Infrastructure Regulation 

(‘‘EMIR’’) entered into force. The EMIR and the 

related regulatory technical standards generally 

regard requirements for clearinghouses, clearing, 

data repositories, regulatory reporting, and 

uncleared OTC transactions. Certain technical 

standards under EMIR have yet to be developed and 

completed. These standards regard margin and 

capital for uncleared transactions and contracts that 

have a ‘‘direct, substantial and foreseeable effect 

within the [European] Union.’’ See EMIR Article 

11(14)(e). 

The Japanese legislature passed the Amendment 

to the Financial Instruments and Exchange Act 

billion in support from the Federal 

Reserve Bank of New York and nearly 

$70 billion from the U.S. Department of 

the Treasury and the Federal Reserve. 

A global, complex, and highly 

integrated business model also played a 

role in, and complicated, the 

bankruptcy of former U.S.-based 

multinational corporation Lehman 

Brothers Holding Inc. (‘‘LBHI’’) in 

September 2008. In addition to 

guaranteeing certain swaps for its 

subsidiary Lehman Brothers 

International Europe (‘‘LBIE’’), 

estimated at nearly 130,000 OTC 

derivatives contracts at the time LBIE 

was placed into administration on 

September 15, 2008, LBHI and its global 

affiliates relied on each other for many 

of their financial and operational 

services, including treasury and 

depository functions, custodial 

arrangements, trading facilitation, and 

information management.6 The 

complexity of the financial and 

operational relationships of LBHI and 

its domestic and international affiliates, 

including with respect to risk associated 

with swaps, provides an example of 

how risks can be transferred across 

multinational affiliated entities, in some 

cases in non-transparent ways that make 

it difficult for market participants and 

regulators to fully assess those risks. 

Even in the absence of an explicit 

business arrangement or guarantee, U.S. 

companies may for reputational or other 

reasons choose, or feel compelled, to 

assume the cost of risks incurred by 

foreign affiliates. In 2007, U.S.-based 

global investment firm Bear Stearns 

decided to extend loans secured by 

assets of uncertain value to two Cayman 

Islands-based hedge funds it sponsored 

after they suffered substantial losses due 

to their investments in subprime 

mortgages, even though Bear Stearns 

was not legally obligated to support 

those funds.7 Shortly thereafter, the 

funds, filed for bankruptcy protection.8

Although the Dodd-Frank Act was 

enacted in the wake of the 2008 

financial crisis, the impact of crossborder activities on the health and 

stability of U.S. companies and financial 

markets is not new. A decade before the 

AIG and Lehman collapses, a Cayman 

Islands hedge fund managed by 

Connecticut-based Long-Term Capital 

Management L.P. (‘‘LTCM’’) nearly 

failed.9 The hedge fund had a swap 

book of more than $1 trillion notional 

and only $4 billion in capital. The 

hedge fund avoided collapse only after 

the Federal Reserve Bank of New York 

intervened and supervised a financial 

rescue and reorganization by creditors 

of the fund.10 While the fund was a 

Cayman Island partnership, its default 

would have caused significant market 

disruption in the United States.11

More recently, J.P. Morgan Chase & 

Co. (‘‘J.P. Morgan’’), the largest U.S. 

bank, disclosed a multi-billion dollar 

trading loss stemming in part from 

positions in a credit-related swap 

portfolio managed through its London 

Chief Investment Office.12 The 

relationship between the New York and 

London offices of J.P. Morgan that were 

involved in the credit swaps that were 

the source of this loss demonstrates the 

close integration among the various 

branches, agencies, offices, subsidiaries 

and affiliates of U.S. financial 

institutions, which may be located both 

inside and outside the United States. 

Despite their geographic expanse, the 

branches, agencies, offices, subsidiaries 

and affiliates of large U.S. financial 

institutions in many cases effectively 

operate as a single business.13

Efforts to regulate the swaps market in 

the wake of the 2008 financial crisis are 

underway not only in the United States, 

but also abroad. In 2009, leaders of the 

Group of 20 (‘‘G20’’)—whose 

membership includes the European 

Union (‘‘EU’’), the United States, and 18 

other countries—agreed that: (i) OTC 

derivatives contracts should be reported 

to trade repositories; (ii) all 

standardized OTC derivatives contracts 

should be cleared through central 

counterparties and traded on exchanges 

or electronic trading platforms, where 

appropriate, by the end of 2012; and (iii) 

non-centrally cleared contracts should 

be subject to higher capital 

requirements. In line with the G20 

commitment, much progress has been 

made to coordinate and harmonize 

international reform efforts, but the pace 

of reform varies among jurisdictions and 

disparities in regulations remain due to 

differences in cultures, legal and 

political traditions, and financial 

systems.14

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45295 

(‘‘FIEA’’) in May 2010. See Japan Financial Services 

Agency, Outline of the bill for amendment of the 

Financial Instruments and Exchange Act (May 

2010), available at http://www.fsa.go.jp/en/refer/ 

diet/174/01.pdf. 

15On October 3, 2008, President Bush signed the 

Emergency Economic Stabilization Act of 2008, 

which was principally designed to allow the U.S. 

Treasury and other government agencies to take 

action to restore liquidity and stability to the U.S. 

financial system (e.g., the Troubled Asset Relief 

Program—also known as TARP—under which the 

U.S. Treasury was authorized to purchase up to 

$700 billion of troubled assets that weighed down 

the balance sheets of U.S. financial institutions). 

See Public Law 110–343, 122 Stat. 3765 (2008). 

16See Financial Crisis Inquiry Commission, The 

Financial Crisis Inquiry Report: Final Report of the 

National Commission on the Causes of the 

Financial and Economic Crisis in the United States 

at xvi-xxvii (Jan. 21, 2011), available at http:// 

www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPOFCIC.pdf. 

17See Proposed Guidance, 77 FR 41214. 

Simultaneously with publication of the Proposed 

Guidance, the Commission published a proposed 

exemptive order providing time-limited relief from 

certain cross-border applications of the swaps 

provisions of Title VII and the Commission’s 

regulations. See Proposed Exemptive Order 

Regarding Compliance with Certain Swap 

Regulations, 77 FR 41110 (July 12, 2012) 

(‘‘Proposed Order’’). The Commission approved a 

final exemptive order on December 21, 2012, which 

reflected certain modifications and clarifications to 

the Proposed Order to address public comments. 

See Final Exemptive Order Regarding Compliance 

with Certain Swap Regulations, 78 FR 858 (Jan. 7, 

2013) (‘‘January Order’’). 

18See 7 U.S.C. 1a(49) (defining the term ‘‘swap 

dealer’’). 

19See Further Definition of ‘Swap Dealer,’ 

‘Security-Based Swap Dealer,’ ‘Major Swap 

Participant,’ ‘Major Security-Based Swap 

Participant’ and ‘Eligible Contract Participant,’ 77 

FR 30596 (May 23, 2012) (‘‘Final Entities Rules’’). 

20See 7 U.S.C. 1a(33) (defining the term ‘‘major 

swap participant’’). 

21The Commission also received approximately 

26 comment letters on the Proposed Order. Because 

the Proposed Guidance and Proposed Order were 

substantially interrelated, many commenters 

submitted a single comment letter addressing both 

proposals. The comment letters submitted in 

response to the Proposed Order and Proposed 

Guidance may be found on the Commission’s Web 

site at http://comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=1234. 

Approximately 200 individuals submitted 

substantially identical letters to the effect that 

oversight of the $700 trillion global derivatives 

market is the key to meaningful reform. The letters 

state that because the market is inherently global, 

risks can be transferred around the world with the 

touch of a button. Further, according to these 

letters, loopholes in the Proposed Guidance could 

allow foreign affiliates of Wall Street banks to 

escape regulation. Lastly, the letters request that the 

Proposed Guidance be strengthened to ensure that 

the Dodd-Frank derivatives protections will directly 

apply to the full global activities of all important 

participants in the U.S. derivatives markets. 

22See Further Proposed Guidance Regarding 

Compliance With Certain Swap Regulations, 78 FR 

909, 913 (Jan. 7, 2013) (‘‘Further Proposed 

Guidance’’). 

23 17 CFR 1.3(ggg)(4). The Commission’s 

regulations are codified at 17 CFR Ch. I. 

24The comment letters submitted in response to 

the Further Proposed Guidance are available on the 

Commission’s Web site at http://comments.cftc.gov/ 

PublicComments/CommentList.aspx?id=1315. 

The failures of Lehman Brothers and 

the Bear Stearns hedge funds, and the 

near failures of LTCM’s hedge fund and 

AIG (which required intervention by the 

government and Federal Reserve), and 

their collateral effects on the broader 

economy and U.S. commerce,15 provide 

examples of how risks that a large 

financial institution takes abroad in 

swap transactions or otherwise can 

result in or contribute to substantial 

losses to U.S. persons and threaten the 

financial stability of the entire U.S. 

financial system. These failures and 

near failures revealed the vulnerability 

of the U.S. financial system and 

economy to systemic risk resulting from, 

among other things, poor risk 

management practices of certain 

financial firms, the lack of supervisory 

oversight for certain financial 

institutions as a whole, and the overall 

interconnectedness of the global swap 

business.16 These failures and near 

failures demonstrate the need for and 

potential implications of cross-border 

swaps regulation. 

B. The Proposed Guidance and Further 

Proposed Guidance 

To address the scope of the crossborder application of the Dodd-Frank 

Act, the Commission published the 

Proposed Guidance on July 12, 2012, 

setting forth its proposed interpretation 

of the manner in which it intends that 

section 2(i) of the CEA would apply 

Title VII’s swaps provisions to crossborder activities.17 In view of the 

complex legal and policy issues 

involved, the Commission published the 

Proposed Guidance to solicit comments 

from all interested persons and to 

further inform the Commission’s 

deliberations. Specifically, the Proposed 

Guidance addressed the general manner 

in which the Commission proposed to 

consider: (1) When a non-U.S. person’s 

swap dealing activities would justify 

registration as a ‘‘swap dealer,’’ 18 as 

further defined in a joint release 

adopted by the Commission and the 

Securities and Exchange Commission 

(‘‘SEC’’); 19 (2) when a non-U.S. person’s 

swaps positions would justify 

registration as a ‘‘major swap 

participant,’’ 20 as further defined in the 

Final Entities Rules; and (3) how foreign 

branches, agencies, affiliates, and 

subsidiaries of U.S. swap dealers 

generally should be treated. The 

Proposed Guidance also generally 

described the policy and procedural 

framework under which the 

Commission would consider 

compliance with a comparable and 

comprehensive regulatory requirement 

of a foreign jurisdiction as a reasonable 

substitute for compliance with the 

attendant requirements of the CEA. Last, 

the Proposed Guidance set forth the 

manner in which the Commission 

proposed to interpret section 2(i) of the 

CEA as it would generally apply to 

clearing, trading, and certain reporting 

requirements under the Dodd-Frank Act 

with respect to swaps between 

counterparties that are not swap dealers 

or MSPs. 

The public comment period on the 

Proposed Guidance ended on August 

27, 2012. The Commission received 

approximately 290 comment letters on 

the Proposed Guidance from a variety of 

interested parties, including major U.S. 

and non-U.S. banks and financial 

institutions that conduct global swap 

business, trade associations, clearing 

organizations, law firms (representing 

international banks and dealers), public 

interest organizations, and foreign 

regulators.21

The Further Proposed Guidance, 

issued on December 21, 2012,22

reflected the Commission’s 

determination that further consideration 

of public comments regarding the 

Commission’s proposed interpretation 

of the term ‘‘U.S. person,’’ and its 

proposed guidance regarding 

aggregation for purposes of swap dealer 

registration, would be helpful to the 

Commission in issuing final interpretive 

guidance. In order to facilitate the 

Commission’s further consideration of 

these issues, in the Further Proposed 

Guidance the Commission sought public 

comment on: (1) An alternative 

interpretation of the aggregation 

requirement for swap dealer registration 

in Commission regulation 1.3(ggg)(4); 23

(2) an alternative ‘‘prong’’ of the 

proposed interpretation of the term 

‘‘U.S. person’’ in the Proposed Guidance 

which relates to U.S. owners that are 

responsible for the liabilities of a nonU.S. entity; and (3) a separate alternative 

prong of the proposed interpretation of 

the term ‘‘U.S. person’’ which relates to 

commodity pools and funds with 

majority-U.S. ownership. 

The public comment period on the 

Further Proposed Guidance ended on 

February 6, 2013. The Commission 

received approximately 24 comment 

letters on the Further Proposed 

Guidance from interested parties 

including major U.S. and non-U.S. 

banks and financial institutions, trade 

associations, law firms (representing 

international banks and dealers), public 

interest organizations, and foreign 

regulators.24 With respect to both the 

Proposed Guidance and the Further 

Proposed Guidance and throughout the 

process of considering this Guidance, 

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25The records of these meetings and 

communications are available on the Commission’s 

Web site at http://www.cftc.gov/LawRegulation/ 

DoddFrankAct/Rulemakings/Cross-Border

ApplicationofSwapsProvisions/index.htm. 

26Sections 722 and 772 of the Dodd-Frank Act 

establish the scope of the Commission’s and SEC’s 

jurisdiction over cross-border swaps and securitybased swaps, respectively. CEA section 2(i), which 

was added by section 722 of the Dodd-Frank Act, 

is discussed above. Section 30(c) of the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’), which was 

added by section 772 of the Dodd-Frank Act, 

provides that the swaps provisions of the Exchange 

Act added by Title VII do not apply ‘‘to any person 

insofar as such person transacts a business in 

security-based swaps without the jurisdiction of the 

United States, unless such person transacts such 

business in contravention of such rules and 

regulations as the [SEC] may prescribe as necessary 

or appropriate to prevent the evasion of any 

provision [added by Title VII of the Dodd-Frank 

Act] . . . ’’ See 15 U.S.C. 78dd(c). 

27See Cross-Border Security-Based Swap 

Activities; Re-Proposal of Regulation SBSR and 

Certain Rules and Forms Relating to the 

Registration of Security-Based Swap Dealers and 

Major Security-Based Swap Participants, 78 FR 

30968 (May 23, 2013) (‘‘SEC Cross-Border 

Proposal’’). 

28The SEC Cross-Border Proposal notes that the 

definition of ‘‘security’’ in the Exchange Act 

includes security-based swaps, which raises issues 

related to the statutory definitions of ‘‘broker’’ and 

‘‘dealer,’’ the statutory exchange registration 

requirement, and other statutory requirements 

related to securities. Id. at 30972. 

29 Id. at 30990. 

30 Id. at 30983–84. 

31One commenter expressed the view that the 

SEC’s proposed rule is entirely inapplicable to the 

CFTC’s statutory mandate to regulate the risks from 

cross border derivatives trading and related 

activities. This commenter stated that the SEC was 

given very limited statutory authority in the DoddFrank Act related solely to anti-evasion, in contrast 

to the Commission, which was given the same antievasion authority plus an affirmative statutory 

mandate to regulate cross-border derivative 

activities that ‘‘have a direct an significant 

connection with activities in, or effect on, 

commerce of the United States.’’ This commenter 

further stated that a broader statutory mandate 

makes sense because the Commission ‘‘has decades 

of expertise and jurisdiction for virtually the entire 

derivatives markets,’’ whereas the SEC has 

‘‘jurisdiction for no more than 3.5 percent of those 

markets.’’ See Better Markets Inc. (‘‘Better Markets’’) 

(Jun. 24, 2013) at 2. 

32This is one aspect of the Commission’s ongoing bilateral and multilateral efforts to promote 

international coordination of regulatory reform. The 

Commission’s staff is engaged in consultations with 

Europe, Japan, Hong Kong, Singapore, Switzerland, 

Canada, Australia, Brazil, and Mexico on 

derivatives reform. In addition, the Commission’s 

staff is participating in several standard-setting 

initiatives, co-chairs the IOSCO Task Force on OTC 

Derivatives, and has created an informal working 

group of derivatives regulators to discuss 

implementation of derivatives reform. See also Joint 

Press Statement of Leaders on Operating Principles 

and Areas of Exploration in the Regulation of the 

Cross-border OTC Derivatives Market, published as 

CFTC Press Release 6439–12, Dec. 4, 2012, available 

at http://www.cftc.gov/PressRoom/PressReleases/ 

pr6439-12; OTC Derivatives Regulators Group 

Report to the G–20 Meeting of Finance Ministers 

and Central Bank Governors of 18–19 April 2013, 

linked to CFTC Press Release ODRG Report to G– 

20, Apr. 16, 2013, available at http://www.cftc.gov/ 

PressRoom/PressReleases/odrg_reporttog20release. 

33See, e.g., Securities Industry and Financial 

Markets Association (‘‘SIFMA’’) (Aug. 27, 2012); 

Institute of International Bankers (‘‘IIB’’) (Aug. 27, 

2012); Sullivan & Cromwell, on behalf of Bank of 

America Corp., Citi, and J.P. Morgan (‘‘Sullivan & 

Cromwell’’) (Aug. 13, 2012); Bank of America 

Merrill Lynch, Barclays Capital, and PNB Paribas et 

al., submitted by Cleary Gottlieb Steen & Hamilton 

LLP (‘‘Cleary’’) (Aug. 16, 2012). 

34See, e.g., Americans for Financial Reform, 

submitted by Marcus Stanley (‘‘AFR’’) (Aug. 27, 

2012); Better Markets (Aug. 16, 2012); Michael 

Greenberger, Francis King Cary School of Law, 

the Commission (and Commission’s 

staff) held numerous meetings and 

discussions with various market 

participants, domestic bank regulators, 

and other interested parties.25

Further, the Commission’s staff 

closely consulted with the staff of the 

SEC in an effort to increase 

understanding of each other’s regulatory 

approaches and to harmonize the crossborder approaches of the two agencies 

to the greatest extent possible, 

consistent with their respective 

statutory mandates.26 The Commission 

is cognizant of the value of 

harmonization by the Commission and 

the SEC of their cross-border policies to 

the fullest extent possible. The staffs of 

the Commission and the SEC have 

participated in numerous meetings to 

work jointly toward this objective. The 

Commission expects that this 

consultative process will continue as 

each agency works towards 

implementing its respective crossborder policy. 

The SEC recently published for public 

comment proposed rules and 

interpretive guidance to address the 

application of the provisions of the 

Exchange Act, added by Subtitle B of 

Title VII of the Dodd-Frank Act, that 

relate to cross-border security-based 

swap activities.27 The Commission has 

considered the SEC’s cross-border 

proposal and has taken it into account 

in the process of considering this 

Guidance. The SEC’s proposal 

acknowledges the statutory provisions 

and regulatory precedents that are 

relevant to security-based swaps by 

virtue of the fact that security-based 

swaps are securities.28 For example, the 

SEC’s proposed rules regarding 

registration of security-based swap 

dealers build from the SEC’s traditional 

approach to the registration of brokers 

and dealers under the Exchange Act.29

The SEC’s proposal also notes the SEC’s 

belief that Congress intended the 

territorial application of Title VII to 

entities and transactions in the securitybased swaps market to follow similar 

principles to those applicable to the 

securities market under the Exchange 

Act.30 The Commission believes that 

one factor in harmonization of the two 

agencies’ approaches is that Congress 

did not express a similar intent that the 

application of Title VII to entities and 

transactions in the swaps market should 

follow principles that preceded the 

Dodd-Frank Act, but rather mandated a 

new regulatory regime for swaps.31

The Commission also recognizes the 

critical role of international cooperation 

and coordination in the regulation of 

derivatives in the highly interconnected 

global market, where risks are 

transmitted across national borders and 

market participants operate in multiple 

jurisdictions. Close cooperative 

relationships and coordination with 

other jurisdictions take on even greater 

importance given that, prior to the 

recent reforms, the swaps market has 

largely operated without regulatory 

oversight, and given that many 

jurisdictions are in differing stages of 

implementing their regulatory reform. 

To this end, the Commission’s staff has 

actively engaged in discussions with 

their foreign counterparts in an effort to 

better understand and develop a more 

harmonized cross-border regulatory 

framework. The Commission expects 

that these discussions will continue as 

it implements the cross-border 

interpretive guidance and as other 

jurisdictions develop their own 

regulatory approaches to derivatives.32

In general, many of the financial 

institutions and law firms (representing 

financial institutions) that commented 

on the Proposed Guidance and Further 

Proposed Guidance stated that the 

Commission’s proposed interpretation 

of the extraterritorial application of Title 

VII of the Dodd-Frank Act was overly 

broad and unnecessarily complex and 

unclear.33 Among the issues they raised 

were concerns relating to the 

interpretation of the term ‘‘U.S. person,’’ 

aggregation for purposes of swap dealer 

registration, lack of parity in the 

treatment of foreign branches and 

affiliates of U.S. persons, the approach 

to guaranteed non-U.S. affiliates and 

non-U.S. affiliate ‘‘conduits,’’ and the 

‘‘comparability’’ assessment for 

purposes of substituted compliance. The 

commenters also urged the Commission 

to allow sufficient time after the 

publication of the final interpretive 

guidance for market participants to 

understand and implement any new 

policies of the Commission, before the 

Commission begins to apply such 

policies. 

Other commenters disagreed that the 

Commission’s proposed interpretation 

of its extraterritorial authority was 

overly broad, instead arguing that the 

Commission had not gone far enough.34

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University of Maryland (‘‘Greenberger’’) (Aug. 13, 

2012). 

35AFR (Aug. 27, 2012) at 2. 

36Letter from Sen. Levin at 3. 

37See 7 U.S.C. 2(i). 

38The Commission notes that part 23 of its 

regulations defines ‘‘swaps activities’’ to mean, 

‘‘with respect to a [registered swap dealer or MSP], 

such registrant’s activities related to swaps and any 

product used to hedge such swaps, including, but 

not limited to, futures, options, other swaps or 

security-based swaps, debt or equity securities, 

foreign currency, physical commodities, and other 

derivatives.’’ See 17 CFR 23.200(j); 23.600(a)(7). 

39 In this regard, the Commission notes that it 

would consider codifying certain aspects of the 

Guidance in future rulemakings, as appropriate; but 

at this time, this guidance is intended to provide 

an efficient and flexible vehicle to communicate the 

agency’s current views on how the Dodd-Frank 

swap requirements would apply on a cross-border 

basis. 

40Certain provisions of Title VII apply regardless 

of whether a swap dealer or MSP is a counterparty 

to the swap. These provisions include the clearing 

requirement (7 U.S.C. 2(h)(1)), the trade execution 

requirement (2(h)(8)), reporting to SDRs 

(2(a)(13)(G)), and real-time public reporting 

(2(a)(13)). 

For example, AFR stated that the 

Proposed Guidance ‘‘takes some real 

positive steps in affirming CFTC 

jurisdiction over a variety of crossborder transactions,’’ but ‘‘falls well 

short of closing potential cross-border 

loopholes.’’ 35 Senator Levin wrote that 

although ‘‘members of the financial 

industry have filed comment letters 

urging the CFTC to weaken its proposals 

. . . American families and businesses 

deserve strong protections against the 

risks posed by derivatives trading, 

including from cross-border swaps, and 

. . . the Proposed Guidance should be 

strengthened rather than weakened.’’ 36

II. Scope of This Guidance 

After carefully reviewing and 

considering the comments on the 

Proposed Guidance and the Further 

Proposed Guidance, the Commission 

has determined to finalize the Proposed 

Guidance. This Guidance sets forth the 

general policy of the Commission in 

interpreting how section 2(i) of the CEA 

provides for the application of the 

swaps provisions of the CEA and 

Commission regulations to cross-border 

activities when such activities have a 

‘‘direct and significant connection with 

activities in, or effect on, commerce of 

the United States’’ or when they 

contravene Commission rulemaking.37

Unlike a binding rule adopted by the 

Commission, which would state with 

precision when particular requirements 

do and do not apply to particular 

situations, this Guidance is a statement 

of the Commission’s general policy 

regarding cross-border swap activities 38

and allows for flexibility in application 

to various situations, including 

consideration of all relevant facts and 

circumstances that are not explicitly 

discussed in the guidance. The 

Commission believes that the statement 

of its policy in this Guidance will assist 

market participants in understanding 

how the Commission intends that the 

registration and certain other 

substantive requirements of the DoddFrank Act generally would apply to 

their cross-border activities.39

This release is intended to inform the 

public of the Commission’s views on 

how it ordinarily expects to apply 

existing law and regulations in the 

cross-border context. In determining the 

application of the CEA and Commission 

regulations to particular entities and 

transactions in cross-border contexts, 

the Commission will apply the relevant 

statutory provisions, including CEA 

section 2(i), and regulations to the 

particular facts and circumstances. 

Accordingly, the public has the ability 

to present facts and circumstances that 

would inform the application of the 

substantive policy positions set forth in 

this release. 

The Commission understands the 

complex and dynamic nature of the 

global swap market and the need to take 

an adaptable approach to cross-border 

issues, particularly as it continues to 

work closely with foreign regulators to 

address potential conflicts with respect 

to each country’s respective regulatory 

regime. Although the Commission is 

issuing the Guidance at this time, the 

Commission will continue to follow 

developments as foreign regulatory 

regimes and the global swaps market 

continue to evolve. In this regard, the 

Commission will periodically review 

this Guidance in light of future 

developments. 

This release is organized into four 

main sections. Section III sets forth the 

Commission’s interpretation of CEA 

section 2(i) and the general manner in 

which it intends to apply the swaps 

provisions of the Dodd-Frank Act to 

activities outside the United States. 

Section IV addresses the public 

comments and Commission Guidance 

on: (A) The Commission’s interpretation 

of the term ‘‘U.S. person’’; (B) swap 

dealer and MSP registration; (C) the 

scope of the term ‘‘foreign branch’’ of a 

U.S. bank and consideration of when a 

swap should be considered to be with 

the foreign branch of a U.S. bank; (D) a 

description of the entity-level 

requirements and transaction-level 

requirements under Title VII and the 

Commission’s related regulations 

(‘‘Entity-Level Requirements’’ and 

‘‘Transaction-Level Requirements,’’ 

respectively); (E) the categorization of 

Title VII swaps provisions (and 

Commission regulations) as either 

Entity-Level or Transaction-Level 

Requirements; (F) substituted 

compliance, including an overview of 

the principles guiding substituted 

compliance determinations for EntityLevel and Transaction-Level 

Requirements, a general description of 

the process for comparability 

determinations, and a discussion of 

conflicts arising under foreign privacy 

and blocking laws; (G) application of the 

Entity-Level Requirements and 

‘‘Category A’’ and ‘‘Category B’’ 

Transaction-Level Requirements to 

swap dealers and MSPs; and (H) 

application of the CEA’s swaps 

provisions and Commission regulations 

where both parties to a swap are neither 

swap dealers nor MSPs.40

In addition, this Guidance includes 

the following Appendices, which 

should be read in conjunction with (and 

are qualified by) the remainder of the 

Guidance: (1) Appendix A—The EntityLevel Requirements; (2) Appendix B— 

The Transaction-Level Requirements: 

(3) Appendix C—Application of the 

Entity-Level Requirements; (4) 

Appendix D—Application of the 

Category A Transaction-Level 

Requirements to Swap Dealers and 

MSPs; (5) Appendix E—Application of 

the Category B Transaction-Level 

Requirements to Swap Dealers and 

MSPs; and (6) Appendix F—Application 

of Certain Entity-Level and TransactionLevel Requirements to Non-Swap 

Dealer/Non-MSP Market Participants. 

III. Interpretation of Section 2(i) 

CEA section 2(i) provides that the 

swaps provisions of Title VII shall not 

apply to activities outside the United 

States unless those activities— 

• Have a direct and significant 

connection with activities in, or effect 

on, commerce of the United States; or 

• contravene such rules or regulations 

as the Commission may prescribe or 

promulgate as are necessary or 

appropriate to prevent the evasion of 

any provision of [the CEA] that was 

enacted by the [Dodd-Frank Act]. 

In the Proposed Guidance, the 

Commission noted that section 2(i) 

provides the Commission express 

authority over swap activities outside 

the United States when certain 

conditions are met, but it does not 

require the Commission to extend its 

reach to the outer bounds of that 

authorization. Rather, in exercising its 

authority with respect to swap activities 

outside the United States, the 

Commission will be guided by 

international comity principles. 

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45298 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

41Sullivan & Cromwell (Aug. 13, 2012) at 6–7. 

42 Id. at 8. 

43 Id. at 9. 

44SIFMA (Aug. 27, 2012) at 2. 

45Sullivan & Cromwell (Aug. 13, 2012) at 10. 

46 Id. at 11; SIFMA (Aug. 27, 2012) at 3 and A55. 

47SIFMA (Aug. 27, 2012) at 3. 

48 12 U.S.C. 611–31. 

49 Id.; Sullivan & Cromwell (Aug. 13, 2012) at 12– 

14. 

50Letter from Sen. Levin at 4. 

51 Id. 

52 Id. 

53 Id. at 7. See also Dodd-Frank Statement (‘‘An 

exemption for foreign derivatives activity by the [

] affiliates of American institutions is a free pass no 

matter where that activity is located.’’). 

54 15 U.S.C. 6a. 

55 15 U.S.C. 1–7. 

56 15 U.S.C. 6a. 

57 6a(1). 

58 6a(2). 

59 542 U.S. 155, 162 (2004) (emphasis in original). 

A. Comments 

Some commenters addressing the 

interpretation of section 2(i) in the 

Proposed Guidance stated that the 

activities of the non-U.S. branches and 

subsidiaries of U.S. persons outside the 

United States with respect to swaps 

with non-U.S. persons should not be 

subject to Dodd-Frank requirements. 

Sullivan & Cromwell asserted that the 

non-U.S. branches and subsidiaries 

generally do not enter into swaps with 

U.S. persons and therefore the 

jurisdictional nexus with the United 

States that would justify application of 

the Dodd-Frank Act is absent.41 Sullivan 

& Cromwell stated that there are 

legitimate business reasons for U.S. 

persons to establish non-U.S. branches 

and subsidiaries, so doing so should not 

be interpreted to mean that the U.S. 

person is using the branch to evade 

application of the Dodd-Frank Act.42

Sullivan & Cromwell argued that the 

Dodd-Frank Act’s application outside 

the United States should be narrowly 

construed because it includes only 

specific exceptions to the judicial 

precedent that U.S. laws should be 

interpreted to apply outside the United 

States only when such application is 

clearly expressed in the law.43

Similarly, SIFMA argued that the 

Commission’s proposal asserted a broad 

jurisdictional scope that is inconsistent 

with the congressional intent expressed 

in section 2(i) of the CEA.44

Sullivan & Cromwell cited past 

instances where the Commission has 

not applied its regulations to firms that 

deal solely with foreign customers and 

do not conduct business in or from the 

United States or to the non-U.S. 

subsidiaries of entities registered with 

the Commission.45 Sullivan & Cromwell 

and SIFMA stated that the application 

of Dodd-Frank requirements to non-U.S. 

swap activities would be contrary to 

principles of international comity and 

cooperation with foreign regulators, 

would lead to less efficient use of 

regulatory resources, and would subject 

the affected entities to potentially 

conflicting regulations and increased 

costs of compliance.46 SIFMA asserted 

that the jurisdictional scope in the 

Commission’s proposal is not necessary 

to prevent evasive activity, because the 

Commission already has broad authority 

to address evasion.47 Sullivan & 

Cromwell and SIFMA also argued that 

imposing the Dodd-Frank requirements 

on non-U.S. branches and subsidiaries 

of U.S. persons would put those entities 

at a disadvantage compared to 

competitors in foreign jurisdictions, 

while other federal laws and banking 

regulations (such as the Edge Act 48) 

indicate that Congress wishes to 

promote such entities’ ability to 

compete in foreign jurisdictions.49

By contrast, Senator Levin stated that 

the J.P. Morgan ‘‘whale trades’’ provide 

an example of how major U.S. financial 

institutions have integrated their U.S. 

and non-U.S. swap activities, and 

therefore supports the application of the 

swaps provisions of Title VII and 

Commission regulations to the non-U.S. 

offices of U.S. financial institutions.50

He explained that a Senate investigation 

found that J.P. Morgan personnel in 

London executed the ‘‘whale trades’’ 

using money from the U.S. bank’s 

excess deposits, and while traders in 

London conducted the trades, the trades 

were attributed to a U.S. affiliate of J.P. 

Morgan through back-to-back 

arrangements between the London 

branch and New York branch.51 He also 

stated the whale trades were entered 

into with counterparties including 

major U.S. banks and J.P. Morgan’s own 

investment bank.52 Senator Levin 

concluded that because of the 

integration of U.S. and non-U.S. offices 

and affiliates of U.S. financial 

institutions, it is critical that the nonU.S. offices and affiliates of U.S. 

financial institutions follow the same 

Dodd-Frank requirements as are 

applicable to the U.S. financial 

institutions.53

B. Statutory Analysis 

In interpreting the phrase ‘‘direct and 

significant,’’ the Commission has 

examined the plain language of the 

statutory provision, similar language in 

other statutes with cross-border 

application, and the legislative history 

of section 2(i). 

The statutory language in new CEA 

section 2(i) is structured similarly to the 

statutory language in the Foreign Trade 

Antitrust Improvements Act of 1982 (the 

‘‘FTAIA’’),54 which provides the 

standard for the cross-border 

application of the Sherman Antitrust 

Act.55 The FTAIA, like CEA section 2(i), 

excludes certain non-U.S. commercial 

transactions from the reach of U.S. law. 

It provides that the antitrust provisions 

of the Sherman Act ‘‘shall not apply to 

[anti-competitive] conduct involving 

trade or commerce . . . with foreign 

nations.’’ 56 However, like paragraph (1) 

of CEA section 2(i), the FTAIA also 

creates exceptions to the general 

exclusionary rule and thus brings back 

within antitrust coverage any conduct 

that: (1) has a ‘‘direct, substantial, and 

reasonably foreseeable effect’’ on U.S. 

commerce; 57 and (2) ‘‘such effect gives 

rise to a [Sherman Act] claim.’’ 58 In F. 

Hoffman-LaRoche, Ltd. v. Empagran 

S.A., the Supreme Court stated that 

‘‘this technical language initially lays 

down a general rule placing all 

(nonimport) activity involving foreign 

commerce outside the Sherman Act’s 

reach. It then brings such conduct back 

within the Sherman Act’s reach 

provided that the conduct both (1) 

sufficiently affects American commerce, 

i.e., it has a ‘direct, substantial, and 

reasonably foreseeable effect’ on 

American domestic, import, or (certain) 

export commerce, and (2) has an effect 

of a kind that antitrust law considers 

harmful, i.e., the ‘effect’ must ‘giv[e] rise 

to a [Sherman Act] claim.’ ’’ 59

It is appropriate, therefore, to read 

section 2(i) of the CEA as a clear 

expression of congressional intent that 

the swaps provisions of Title VII of the 

Dodd-Frank Act apply to activities 

beyond the borders of the United States 

when certain circumstances are present. 

These circumstances include, pursuant 

to paragraph (1) of section 2(i), when 

activities outside the United States meet 

the statutory test of having a ‘‘direct and 

significant connection with activities in, 

or effect on,’’ U.S. commerce. 

An examination of the language in the 

FTAIA, however, does not provide an 

unambiguous roadmap for the 

Commission in interpreting section 2(i) 

of the CEA. There are both similarities, 

and a number of significant differences, 

between the language in CEA section 

2(i) and the language in the FTAIA. 

Further, the Supreme Court has not 

provided definitive guidance as to the 

meaning of the ‘‘direct, substantial, and 

reasonably foreseeable’’ test in the 

FTAIA, and the lower courts have 

interpreted the individual terms in the 

FTAIA differently. 

Although a number of courts have 

interpreted the various terms in the 

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60See 28 U.S.C. 1605(a)(2). 

61United States v. LSL Biotechnologies, 379 F.3d 

672, 693 (9th Cir. 2004). ‘‘As a threshold matter, 

many courts have debated whether the FTAIA 

established a new jurisdictional standard or merely 

codified the standard applied in [United States v. 

Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945)] 

and its progeny. Several courts have raised this 

question without answering it. The Supreme Court 

did as much in [Harford Fire Ins. Co. v. California, 

509 U.S. 764 (1993)].’’ Id. at 678. 

62 Id. at 692–3, quoting Republic of Argentina v. 

Weltover, Inc., 504 U.S. 607, 618 (1992) (providing 

that, pursuant to the FSIA, 28 U.S.C. 1605(a)(2), 

immunity does not extend to commercial conduct 

outside the United States that ‘‘causes a direct effect 

in the United States’’). 

63 Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 

857 (7th Cir. 2012) (en banc). 

64 Id. 

65 Id. at 856–57. 

66See, e.g., Animal Sciences Products. v. China 

Minmetals Corp., 654 F.3d 462, 471 (3d Cir. 2011) 

(‘‘[T]he FTAIA’s ‘reasonably foreseeable’ language 

imposes an objective standard: the requisite ‘direct’ 

and ‘substantial’ effect must have been ‘foreseeable’ 

to an objectively reasonable person.’’). 

67Hoffman-LaRoche, 452 U.S. at 173. 68The provision that ultimately became section 

722(d) of the Dodd-Frank Act was added during 

consideration of the legislation in the House of 

Representatives. See 155 Cong. Rec. H14685 (Dec. 

10, 2009). The version of what became Title VII that 

was reported by the House Agriculture Committee 

and the House Financial Services Committee did 

not include any provision addressing cross-border 

application. See 155 Cong. Rec. H14549 (Dec. 10, 

2009). The Commission finds it significant that, in 

adding the cross-border provision before final 

passage, the House did so in terms that, as 

discussed in text, were different from, and broader 

than, the terms used in the analogous provision of 

the FTAIA. 

69See Proposed Guidance, 77 FR at 41215–41216. 

70Cf. 156 Cong. Rec. S5818 (July 14, 2010) 

(statement of Sen. Lincoln) (‘‘In 2008, our Nation’s 

economy was on the brink of collapse. America was 

being held captive by a financial system that was 

so interconnected, so large, and so irresponsible 

that our economy and our way of life were about 

to be destroyed.’’), available at 

http://www.gpo.gov/fdsys/pkg/CREC-2010-07-14/ 

pdf/CREC-2010-07-14.pdf; 156 Cong. Rec. S5888 

(July 15, 2010) (statement of Sen. Shaheen) (‘‘We 

need to put in place reforms to stop Wall Street 

firms from growing so big and so interconnected 

that they can threaten our entire economy.’’), 

available at http://www.gpo.gov/fdsys/pkg/CREC2010-07-15/pdf/CREC-2010-07-15-senate.pdf; 156 

Cong. Rec. S5905 (July 15, 2010) (statement of Sen. 

Stabenow) (‘‘For too long the over-the-counter 

derivatives market has been unregulated, 

transferring risk between firms and creating a web 

of fragility in a system where entities became too 

interconnected to fail.’’), available at http:// 

www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/ 

CREC-2010-07-15-senate.pdf. 

71The legislative history of the Dodd-Frank Act 

shows that in the fall of 2009, neither the Over-theCounter Derivatives Markets Act of 2009, H.R. 3795, 

111th Cong. (1st Sess. 2009), reported by the 

Financial Services Committee chaired by Rep. 

Barney Frank, nor the Derivatives Markets 

Transparency and Accountability Act of 2009, H.R. 

977, 111th Cong. (1st Sess. 2009), reported by the 

Agriculture Committee chaired by Rep. Collin 

Peterson, included a general territoriality limitation 

that would have restricted Commission regulation 

of transactions between two foreign persons located 

outside of the United States. During the House 

Financial Services Committee markup on October 

14, 2009, Rep. Spencer Bachus offered an 

Continued 

FTAIA, only the term ‘‘direct’’ appears 

in both CEA section 2(i) and the FTAIA. 

Relying upon the Supreme Court’s 

definition of the term ‘‘direct’’ in the 

Foreign Sovereign Immunities Act 

(‘‘FSIA’’),60 the U.S. Court of Appeals 

for the Ninth Circuit construed the term 

‘‘direct’’ in the FTAIA as requiring a 

‘‘relationship of logical causation,’’ 61

such that ‘‘an effect is ‘direct’ if it 

follows as an immediate consequence of 

the defendant’s activity.’’ 62 However, in 

an en banc decision, the U.S. Court of 

Appeals for the Seventh Circuit held 

that ‘‘the Ninth Circuit jumped too 

quickly on the assumption that the FSIA 

and the FTAIA use the word ‘direct’ in 

the same way.’’ 63 After examining the 

text of the FTAIA as well as its history 

and purpose, the Seventh Circuit found 

persuasive the ‘‘other school of thought 

[that] has been articulated by the 

Department of Justice’s Antitrust 

Division, which takes the position that, 

for FTAIA purposes, the term ‘direct’ 

means only ‘a reasonably proximate 

causal nexus.’ ’’ 64 The Seventh Circuit 

rejected interpretations of the term 

‘‘direct’’ that included any requirement 

that the consequences be foreseeable, 

substantial, or immediate.65

Other terms in the FTAIA differ from 

the terms used in section 2(i) of the 

CEA. First, the FTAIA test explicitly 

requires that the effect on U.S. 

commerce be a ‘‘reasonably foreseeable’’ 

result of the conduct.66 Section 2(i) of 

the CEA, by contrast, does not provide 

that the effect on U.S. commerce must 

be foreseeable. Second, whereas the 

FTAIA solely relies on the ‘‘effects’’ on 

U.S. commerce to determine crossborder application of the Sherman Act, 

section 2(i) of the CEA refers to both 

‘‘effect’’ and ‘‘connection.’’ ‘‘The FTAIA 

says that the Sherman Act applies to 

foreign ‘conduct’ with a certain kind of 

harmful domestic effect.’’ 67 Section 2(i), 

by contrast, applies more broadly—not 

only to particular instances of conduct 

that have an effect on U.S. commerce, 

but also to activities that have a direct 

and significant ‘‘connection with 

activities in’’ U.S. commerce. Unlike the 

FTAIA, section 2(i) applies the swaps 

provisions of the CEA to activities 

outside the United States that have the 

requisite connection with activities in 

U.S. commerce, regardless of whether a 

‘‘harmful domestic effect’’ has occurred. 

As the foregoing textual analysis 

indicates, Congress crafted section 2(i) 

differently from its analogue in the 

antitrust laws. Congress delineated the 

cross-border scope of the Sherman Act 

in section 6a of the FTAIA as applying 

to conduct that has a ‘‘direct’’ and 

‘‘substantial’’ and ‘‘reasonably 

foreseeable’’ ‘‘effect’’ on U.S. commerce. 

In section 2(i), on the other hand, 

Congress did not include a requirement 

that the effects or connections of the 

activities outside the United States be 

‘‘reasonably foreseeable’’ for the DoddFrank swaps provisions to apply. 

Further, Congress included language in 

section 2(i) to apply the Dodd-Frank 

swaps provisions in circumstances in 

which there is a direct and significant 

connection with activities in U.S. 

commerce, regardless of whether there 

is an effect on U.S. commerce. The 

different words that Congress used in 

paragraph (1) of section 2(i), as 

compared to its closest statutory 

analogue in section 6a of the FTAIA, 

inform the Commission in construing 

the boundaries of its cross-border 

authority over swap activities under the 

CEA.68 Accordingly, the Commission 

believes it is appropriate to interpret 

section 2(i) such that it applies to 

activities outside the United States in 

circumstances in addition to those that 

would be reached under the FTAIA 

standard. 

As further described in the Proposed 

Guidance, one of the principal 

rationales for the enactment of the 

Dodd-Frank derivatives reforms was the 

need for a comprehensive scheme of 

regulation to prevent systemic risk in 

the U.S. financial system.69 More 

particularly, a primary purpose of Title 

VII of the Dodd-Frank Act is to address 

risk to the U.S. financial system created 

by interconnections in the swaps 

market.70 Title VII of the Dodd-Frank 

Act gave the Commission new and 

broad authority to regulate the swaps 

market to address and mitigate risks 

arising from swap activities that in the 

future could cause a financial crisis. 

In global markets, the source of such 

risk is not confined to activities within 

U.S. borders. Due to the 

interconnectedness between firms, 

traders, and markets in the U.S. and 

abroad, a firm’s failure, or trading losses 

overseas, can quickly spill over to the 

United States and affect activities in 

U.S. commerce and the stability of the 

U.S. financial system. Accordingly, 

Congress did not limit the application of 

the Dodd-Frank Act to activities within 

the United States. Rather, in recognition 

of the global nature of the swaps market, 

and the fact that risks to the U.S. 

financial system may arise from 

activities outside the United States, as 

well as from activities within the United 

States, Congress explicitly provided for 

cross-border application of Title VII to 

activities outside the United States that 

pose risks to the U.S. financial system.71

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amendment that would have restricted the 

jurisdiction of the Commission over swaps between 

non-U.S. resident persons transacted without the 

use of the mails or any other means or 

instrumentality of interstate commerce. Chairman 

Frank opposed the amendment, noting that there 

may well be cases where non-U.S. residents are 

engaging in transactions that have an effect on the 

United States and that are insufficiently regulated 

internationally and that he would not want to 

prevent U.S. regulators from stepping in. Chairman 

Frank expressed his commitment to work with Rep. 

Bachus going forward, and Rep. Bachus withdrew 

the amendment. See H. Fin. Serv. Comm. Mark Up 

on Discussion Draft of the Over-the-Counter 

Derivatives Markets Act of 2009, 111th Cong., 1st 

Sess. (Oct. 14, 2009) (statements of Rep. Bachus and 

Rep. Frank), available at http://financialservices.

house.gov/calendar/eventsingle.aspx?Event

ID=231922. 

72The Commission also notes that the Supreme 

Court has indicated that the FTAIA may be 

interpreted more broadly when the government is 

seeking to protect the public from anticompetitive 

conduct than when a private plaintiff brings suit. 

See Hoffman-LaRoche, 452 U.S. at 170 (‘‘A 

Government plaintiff, unlike a private plaintiff, 

must seek to obtain the relief necessary to protect 

the public from further anticompetitive conduct 

and to redress anticompetitive harm. And a 

Government plaintiff has legal authority broad 

enough to allow it to carry out its mission.’’). 

73See note 63 and accompanying text, supra. 

74The Seventh Circuit’s rationale for rejecting the 

Ninth Circuit’s interpretation applies with at least 

equal, if not greater, force to the interpretation of 

the word ‘‘direct’’ in section 2(i) of the CEA. As 

discussed in note 68 and the accompanying text, 

supra, Congress expressly declined to import the 

FTAIA standards of substantiality, immediacy, or 

foreseeability into section 2(i). The Commission 

believes that the terms included in section 2(i) that 

are the same as the terms in the FTAIA should be 

interpreted in a manner consistent with Congress’s 

determination to not import other, different 

standards from the FTAIA into section 2(i). Where 

Congress has included in a new statute one term but 

not another from an existing statute, it is reasonable 

to conclude that Congress did not want the other 

existing standards included in the new statute. 

75The Commission believes this interpretation is 

supported by Congress’s use of the plural term 

‘‘activities’’ in CEA section 2(i), rather than the 

singular term ‘‘activity.’’ The Commission believes 

it is reasonable to interpret the use of the plural 

term ‘‘activities’’ in section 2(i) to require not that 

each particular activity have the requisite 

connection with U.S. commerce, but rather that 

such activities in the aggregate, or a class of activity, 

have the requisite nexus with U.S. commerce. This 

interpretation is consistent with the overall 

objectives of Title VII, as described above. Further, 

the Commission believes that a swap-by-swap 

approach to jurisdiction would be ‘‘too complex to 

prove workable.’’ See Hoffman-LaRoche, 542 U.S. at 

168. 

76 132 S. Ct. 2566 (2012). 77 317 U.S. 111 (1942). 78 132 S. Ct. 2566, 2588 (2012). At issue in 

Wickard was the regulation of a farmer’s production 

and use of wheat even though the wheat was ‘‘not 

intended in any part for commerce but wholly for 

consumption on the farm.’’ 317 U.S. at 118. The 

Supreme Court upheld the application of the 

regulation, stating that although the farmer’s ‘‘own 

contribution to the demand for wheat may be trivial 

by itself,’’ the federal regulation could be applied 

when his contribution ‘‘taken together with that of 

many others similarly situated, is far from trivial.’’ 

Id. at 128–29. The Court also stated it had ‘‘no 

doubt that Congress may properly have considered 

that wheat consumed on the farm where grown, if 

wholly outside the scheme of regulation, would 

have a substantial effect in defeating and 

obstructing its purpose . . . .’’ Id. 

79 545 U.S. 1 (2005). 

80 21 U.S.C. 801 et seq. 

81 In Sebelius, the Court stated, ‘‘Where the class 

of activities is regulated, and that class is within the 

reach of federal power, the courts have no power 

to excise, as trivial, individual instances of the 

class.’’ 132 S. Ct. at 2587 (quoting Perez v. United 

States, 402 U.S. 146, 154 (1971). 

82 542 U.S. at 164. 

83 Id. at 165. 

Therefore, upon consideration of the 

statutory language, as well as the 

prophylactic purpose of the CEA and 

the amendments made to it by Title VII, 

the Commission construes section 2(i) to 

apply the swaps provisions of the CEA 

to activities outside the United States 

that have either: (1) A direct and 

significant effect on U.S. commerce; or, 

in the alternative, (2) a direct and 

significant connection with activities in 

U.S. commerce, and through such 

connection present the type of risks to 

the U.S. financial system and markets 

that Title VII directed the Commission 

to address. The Commission interprets 

section 2(i) in a manner consistent with 

the overall goals of the Dodd-Frank Act 

to reduce risks to the U.S. financial 

system and avoid future financial 

crises.72

Consistent with this overall 

interpretation, the Commission believes 

that the term ‘‘direct’’ in CEA section 

2(i) should be interpreted in a manner 

consistent with the position of the 

Department of Justice Antitrust Division 

with respect to the meaning of the same 

term in the FTAIA, and as recently 

adopted by the Seventh Circuit.73 The 

Commission therefore interprets the 

term ‘‘direct’’ in section 2(i) so as to 

require ‘‘a reasonably proximate causal 

nexus’’ and not to require foreseeability, 

substantiality, or immediacy.74

Consistent with the purpose of Title 

VII to protect the U.S. financial system 

against the build-up of systemic risks, 

the Commission does not read section 

2(i) so as to require a transaction-bytransaction determination that a specific 

swap outside the United States has a 

‘‘direct and significant connection with 

activities in, or effect on, commerce of 

the United States’’ in order to apply the 

swaps provisions of the CEA to such 

transactions. Rather, it is the connection 

of swap activities, viewed as a class or 

in the aggregate, to activities in 

commerce of the United States that must 

be assessed to determine whether 

application of the CEA swaps provisions 

is warranted.75

This conclusion is bolstered by 

similar interpretations of other federal 

statutes regulating interstate commerce. 

Recently, the Supreme Court reaffirmed 

a similar ‘‘aggregate effects’’ approach in 

Nat’l Fed’n of Indep. Bus. v. Sebelius.76

In that case, the Court phrased the 

holding in the seminal ‘‘aggregate 

effects’’ decision, Wickard v. Filburn,77

in this way: ‘‘[The farmer’s] decision, 

when considered in the aggregate along 

with similar decisions of others, would 

have had a substantial effect on the 

interstate market for wheat.’’ 78 In 

another recent case, Gonzales v Raich,79

the Court adopted similar reasoning to 

uphold the application of the Controlled 

Substance Act 80 to prohibit the 

intrastate use of medical marijuana for 

medicinal purposes. In Raich, the Court 

held that Congress could regulate purely 

intrastate activity if the failure to do so 

would ‘‘leave a gaping hole’’ in the 

federal regulatory structure. These cases 

support the Commission’s cross-border 

authority over swap activities that as a 

class, or in the aggregate, have a direct 

and significant connection with 

activities in, or effect on, U.S. 

commerce—whether or not an 

individual swap may satisfy the 

statutory standard.81

C. Principles of International Comity 

The case law in the antitrust area also 

teaches the importance of recognizing 

the laws and interests of other countries 

in applying an ambiguous federal 

statute across borders; in such 

circumstances, principles of 

international comity counsel courts and 

agencies to act reasonably in exercising 

jurisdiction with respect to activity that 

takes place elsewhere. In HoffmanLaRoche, an antitrust class action 

lawsuit alleging an international pricefixing conspiracy by foreign and 

domestic vitamin manufacturers and 

distributors, the Supreme Court held 

that ambiguous statutes should be 

construed to ‘‘avoid unreasonable 

interference with the sovereign 

authority of other nations.’’ 82 The Court 

explained that this rule of construction 

‘‘reflects customary principles of 

international law’’ and ‘‘helps the 

potentially conflicting laws of different 

nations work together in harmony—a 

harmony particularly needed in today’s 

highly interdependent commercial 

world.’’ 83

In determining whether the exercise 

of jurisdiction by one nation over 

activities in another nation would be 

reasonable, the courts and agencies are 

guided by the Restatement (Third) of 

Foreign Relations Law of the United 

States (the ‘‘Restatement’’). Drawing 

upon traditional principles of 

international law, the Restatement 

provides bases of jurisdiction to 

prescribe law, as well as limitations on 

the exercise of jurisdiction. In addition 

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84See Restatement sec. 402(1)(c). A comment to 

the Restatement also identifies jurisdiction with 

respect to activity outside the country, but having 

or intended to have substantial effect within the 

country’s territory, as an aspect of jurisdiction 

based on territoriality. See Restatement sec. 402 

cmt. d. 85Restatement sec. 403(1). 86Restatement sec. 403(2). 87With regard to conflicting exercises of 

jurisdiction, section 403(3) of the Restatement 

states: 

(3) When it would not be unreasonable for each 

of the two states to exercise jurisdiction over a 

person or activity, but the prescriptions by the two 

states are in conflict, each state has an obligation 

to evaluate its own as well as the other state’s 

interest in exercising jurisdiction, in light of all the 

relevant factors, including those set out in 

Subsection (2), a state should defer to the other state 

if that state’s interest is clearly greater. 

Comment e. to section 403 of the Restatement 

states: 

Conflicting exercises of jurisdiction. Subsection 

(3) applies when an exercise of jurisdiction by each 

of two states is not unreasonable, but their 

regulations conflict. In that case, each state is 

required to evaluate both its interests in exercising 

jurisdiction and those of the other state. When 

possible, the two states should consult with each 

other. If one state has a clearly greater interest, the 

other should defer, by abandoning its regulation or 

interpreting or modifying it so as to eliminate the 

conflict. When neither state has a clearly stronger 

interest, states often attempt to eliminate the 

conflict so as to reduce international friction and 

avoid putting those who are the object of the 

regulations in a difficult situation. Subsection (3) is 

addressed primarily to the political departments of 

government, but it may be relevant also in judicial 

proceedings. 

Subsection (3) applies only when one state 

requires what another prohibits, or where 

compliance with the regulations of two states 

exercising jurisdiction consistently with this 

section is otherwise impossible. It does not apply 

where a person subject to regulation by two states 

can comply with the laws of both; for example, 

where one state requires keeping accounts on a cash 

basis, the other on an accrual basis. It does not 

apply merely because one state has a strong policy 

to permit or encourage an activity which another 

state prohibits, or one state exempts from regulation 

an activity which another regulates. Those 

situations are governed by Subsection (2), but do 

not constitute conflict within Subsection (3). 

88For purposes of this Guidance, the terms 

‘‘home jurisdiction’’ or ‘‘home country’’ are used 

interchangeably and refer to the jurisdiction in 

which the person or entity is established, including 

the European Union. 

89As discussed in section IV.F, infra, the 

Commission’s recognition of substituted 

compliance would be based on an evaluation of 

whether the requirements of the foreign jurisdiction 

are comparable and comprehensive compared to the 

applicable requirement(s) under the CEA and 

Commission regulations, based on a consideration 

of all relevant factors, including among other 

things: (i) the comprehensiveness of the foreign 

regulator’s supervisory compliance program, and 

(ii) the authority of such foreign regulator to 

support and enforce its oversight of the registrant’s 

branch or agency with regard to such activities to 

which substituted compliance applies. 

90See Proposed Guidance, 77 FR at 41218. The 

discussion of the term ‘‘U.S. person’’ in this 

Guidance is limited to the relevance of this term for 

purposes of the Commission regulations 

promulgated under Title VII. The Commission does 

not intend that this discussion would apply to other 

uses of the term ‘‘person’’ in the CEA. 

to recognizing territoriality and 

nationality as bases for jurisdiction, the 

Restatement expressly provides that a 

country has jurisdiction to prescribe law 

with respect to ‘‘conduct outside its 

territory that has or is intended to have 

substantial effect within its territory.’’ 84

The Restatement also provides that 

even where a country has a basis for 

jurisdiction, it should not prescribe law 

with respect to a person or activity in 

another country when the exercise of 

such jurisdiction is unreasonable.85 The 

reasonableness of such an exercise of 

jurisdiction, in turn, is to be determined 

by evaluating all relevant factors, 

including certain specifically 

enumerated factors where appropriate: 

(a) the link of the activity to the territory 

of the regulating state, i.e., the extent to 

which the activity takes place within the 

territory, or has substantial, direct, and 

foreseeable effect upon or in the territory; 

(b) the connections, such as nationality, 

residence, or economic activity, between the 

regulating state and the persons principally 

responsible for the activity to be regulated, or 

between that state and those whom the 

regulation is designed to protect; 

(c) the character of the activity to be 

regulated, the importance of regulation to the 

regulating state, the extent to which other 

states regulate such activities, and the degree 

to which the desirability of such regulation 

is generally accepted; 

(d) the existence of justified expectations 

that might be protected or hurt by the 

regulation; 

(e) the importance of the regulation to the 

international political, legal, or economic 

system; 

(f) the extent to which the regulation is 

consistent with the traditions of the 

international system; 

(g) the extent to which another state may 

have an interest in regulating the activity; 

and 

(h) the likelihood of conflict with 

regulation by another state.86

Notably, the Restatement does not 

preclude concurrent regulation by 

multiple jurisdictions. However, where 

concurrent jurisdiction by two or more 

jurisdictions creates conflict, the 

Restatement recommends that each 

country evaluate both its interests in 

exercising jurisdiction and those of the 

other jurisdiction, and where possible, 

to consult with each other.87

Consistent with the Restatement, in 

determining the extent to which the 

Dodd-Frank swaps provisions apply to 

activities abroad, the Commission has 

strived to protect U.S. interests as 

determined by Congress in Title VII, and 

minimize conflicts with the laws of 

other jurisdictions. The Commission has 

carefully considered, among other 

things, the level of the home 

jurisdiction’s supervisory interests over 

the subject activity and the extent to 

which the activity takes place within 

the foreign territory.88 At the same time, 

the Commission has also considered the 

potential for cross-border activities to 

have substantial connection to or impact 

on the U.S. financial system and the 

global, highly integrated nature of 

today’s swap business; to fulfill the 

purposes of the Dodd-Frank swaps 

reform, the Commission’s supervisory 

oversight cannot be confined to 

activities strictly within the territory of 

the United States. 

The Commission believes that the 

Guidance strikes the proper balance 

between these competing factors to 

ensure that the Commission can 

discharge its responsibilities to protect 

the U.S. markets, market participants, 

and financial system, consistent with 

the traditions of the international 

system and comity principles, as set 

forth in the Restatement. Of particular 

relevance is the Commission’s approach 

to substituted compliance, which would 

be expected to mitigate any burden 

associated with potentially conflicting 

foreign regulations and would generally 

be appropriate in light of the 

supervisory interests of foreign 

regulators in entities domiciled and 

operating in its jurisdiction.89

In addition, recognizing that close 

cooperation and coordination with other 

jurisdictions is vital to the regulation of 

derivatives in the highly interconnected 

global market, the Commission’s staff 

expects to remain actively engaged in 

discussions with foreign regulators as 

the Commission implements the crossborder interpretive guidance and as 

other jurisdictions develop their own 

regulatory requirements for derivatives. 

The Commission recognizes that 

conflicts of law may exist and is ready 

to address those issues as they may 

arise. In that regard, where a real 

conflict of laws exists, the Commission 

strongly encourages regulators and 

registrants to consult directly with its 

staff. 

IV. Guidance 

A. Interpretation of the Term ‘‘U.S. 

Person’’ 

1. Proposed Interpretation 

Under the Proposed Guidance, the 

term ‘‘U.S. person’’ identifies those 

persons who, under the Commission’s 

interpretation, could be expected to 

satisfy the jurisdictional nexus under 

section 2(i) of the CEA based on their 

swap activities either individually or in 

the aggregate.90 As proposed, the 

Commission’s interpretation of the term 

‘‘U.S. person’’ would generally 

encompass: (1) persons (or classes of 

persons) located within the United 

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States; and (2) persons that may be 

domiciled or operate outside the United 

States but whose swap activities 

nonetheless have a ‘‘direct and 

significant connection with activities in, 

or effect on, commerce of the United 

States’’ within the meaning of CEA 

section 2(i). 

Specifically, as set forth in the 

Proposed Guidance, the Commission’s 

interpretation of the term ‘‘U.S. person’’ 

would generally include, but not be 

limited to: 

(i) any natural person who is a resident of 

the United States; 

(ii) any corporation, partnership, limited 

liability company, business or other trust, 

association, joint-stock company, fund or any 

form of enterprise similar to any of the 

foregoing, in each case that is either (A) 

organized or incorporated under the laws of 

the United States or having its principal 

place of business in the United States (legal 

entity) or (B) in which the direct or indirect 

owners thereof are responsible for the 

liabilities of such entity and one or more of 

such owners is a U.S. person; 

(iii) any individual account (discretionary 

or not) where the beneficial owner is a U.S. 

person; 

(iv) any commodity pool, pooled account, 

or collective investment vehicle (whether or 

not it is organized or incorporated in the 

United States) of which a majority ownership 

is held, directly or indirectly, by a U.S. 

person(s); 

(v) any commodity pool, pooled account, 

or collective investment vehicle the operator 

of which would be required to register as a 

commodity pool operator under the CEA; 

(vi) a pension plan for the employees, 

officers or principals of a legal entity with its 

principal place of business inside the United 

States; and 

(vii) an estate or trust, the income of which 

is subject to U.S. income tax regardless of 

source. 

Under the proposed interpretation, a 

‘‘U.S. person’’ would include a foreign 

branch of a U.S. person; on the other 

hand, a non-U.S. affiliate guaranteed by 

a U.S. person would not be within the 

Commission’s interpretation of the term 

‘‘U.S. person.’’ 

The Further Proposed Guidance 

included alternatives for two ‘‘prongs’’ 

of the proposed interpretation of the 

term ‘‘U.S. person’’ in the Proposed 

Guidance: prong (ii)(B), which relates to 

U.S. owners that are responsible for the 

liabilities of a non-U.S. entity; and 

prong (iv), which relates to commodity 

pools and funds with majority-U.S. 

ownership. 

The alternative version of prong (ii)(B) 

in the Further Proposed Guidance 

would limit its scope to a non-U.S. legal 

entity that is directly or indirectly 

majority-owned by one or more natural 

persons or legal entities that meet prong 

(i) or (ii) of the interpretation, in which 

such U.S. person(s) bears unlimited 

responsibility for the obligations and 

liabilities of the legal entity. This 

alternative prong (ii)(B) would generally 

not include an entity that is a 

corporation, limited liability company 

or limited liability partnership where 

shareholders, members or partners have 

limited liability. Further, the 

Commission stated in the Further 

Proposed Guidance that the majorityownership criterion would be intended 

to avoid capturing those legal entities 

that have negligible U.S. ownership 

interests. Unlimited liability 

corporations where U.S. persons have 

majority ownership and where such 

U.S. persons have unlimited liability for 

the obligations and liabilities of the 

entity generally would be covered under 

this alternative to prong (ii)(B). 

The alternative prong (ii)(B) in the 

Further Proposed Guidance was as 

follows: 

(ii) A corporation, partnership, limited 

liability company, business or other trust, 

association, joint-stock company, fund or any 

form of enterprise similar to any of the 

foregoing, in each case that is either (A) 

organized or incorporated under the laws of 

a state or other jurisdiction in the United 

States or having its principal place of 

business in the United States or (B) directly 

or indirectly majority-owned by one or more 

persons described in prong (i) or (ii)(A) and 

in which such person(s) bears unlimited 

responsibility for the obligations and 

liabilities of the legal entity (other than a 

limited liability company or limited liability 

partnership where partners have limited 

liability); 

The Further Proposed Guidance 

explained that this alternative proposed 

prong would generally treat an entity as 

a U.S. person if one or more of its U.S. 

majority owners has unlimited 

responsibility for losses of, or 

nonperformance by, the entity. This 

prong would reflect that when the 

structure of an entity is such that the 

U.S. direct or indirect owners are 

ultimately liable for the entity’s 

obligations and liabilities, the 

connection to activities in, or effect on, 

U.S. commerce would be expected to 

satisfy the requisite jurisdictional nexus. 

This ‘‘look-through’’ requirement also 

would serve to discourage persons from 

creating such indirect ownership 

structures for the purpose of engaging in 

activities outside of the Dodd-Frank 

regulatory regime. Under the Further 

Proposed Guidance, this alternative 

proposed prong generally would not 

render a legal entity organized or 

domiciled in a foreign jurisdiction a 

‘‘U.S. person’’ simply because the 

entity’s swaps obligations are 

guaranteed by a U.S. person. 

With respect to prong (iv) of the 

interpretation of the term ‘‘U.S. person’’ 

in the Proposed Guidance, the Further 

Proposed Guidance set forth an 

alternative under which any commodity 

pool, pooled account, investment fund 

or other collective investment vehicle 

generally would be within the 

interpretation of the term ‘‘U.S. person’’ 

if it is (directly or indirectly) majorityowned by one or more natural persons 

or legal entities that meet prong (i) or (ii) 

of the interpretation of the term ‘‘U.S. 

person.’’ The Further Proposed 

Guidance explained that for purposes of 

this alternative prong (iv), the 

Commission would interpret ‘‘majorityowned’’ to mean the beneficial 

ownership of 50 percent or more of the 

equity or voting interests in the 

collective investment vehicle. Similar to 

the alternative prong (ii)(B) discussed 

above, the Commission generally would 

not interpret the collective investment 

vehicle’s place of organization or 

incorporation to be determinative of its 

status as a U.S. person. The Further 

Proposed Guidance clarified that under 

alternative prong (iv), the Commission 

would interpret the term ‘‘U.S. person’’ 

to include a pool, fund, or other 

collective investment vehicle that is 

publicly traded only if it is offered, 

directly or indirectly, to U.S. persons. 

The alternative prong (iv) in the 

Further Proposed Guidance was as 

follows: 

(iv) A commodity pool, pooled account, 

investment fund, or other collective 

investment vehicle that is not described in 

prong (ii) and that is directly or indirectly 

majority-owned by one or more persons 

described in prong (i) or (ii), except any 

commodity pool, pooled account, investment 

fund, or other collective investment vehicle 

that is publicly-traded but not offered, 

directly or indirectly, to U.S. persons; 

The Further Proposed Guidance 

explained that this alternative proposed 

prong (iv) is intended to capture 

collective investment vehicles that are 

created for the purpose of pooling assets 

from U.S. investors and channeling 

these assets to trade or invest in line 

with the objectives of the U.S. investors, 

regardless of the place of the vehicle’s 

organization or incorporation. These 

collective investment vehicles may 

serve as a means to achieve the 

investment objectives of their beneficial 

owners, rather than being separate, 

active operating businesses. As such, 

the beneficial owners would be directly 

exposed to the risks created by the 

swaps that their collective investment 

vehicles enter into. 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45303 

91See SIFMA (Aug. 27, 2012) at 5; Societe 

Generale (‘‘SocGen’’) (Aug. 8, 2012) at 4; IIB (Aug. 

27, 2012) at 4–14; Deutsche Bank AG (‘‘Deutsche 

Bank’’) (Aug. 27, 2012) at 1–4; Goldman Sachs 

‘‘(Goldman’’) (Aug. 27, 2012) at 3; The Hong Kong 

Association of Banks (‘‘Hong Kong Banks’’) (Aug. 

27, 2012) at 3–4; Australian Bankers’ Association 

Inc. (‘‘Australian Bankers’’) (Aug. 27, 2012) at 4. 

92SIFMA (August 27, 2012) at A10. 

93See, e.g., European Commission (Aug. 24, 2012) 

at 1–2; Hong Kong Banks (Aug. 27, 2012) at 4; J.P. 

Morgan (Aug. 13, 2012) at 9. 

94See Better Markets (Feb. 15, 2013) at 4–8; 

Michael Greenberger and Brandy Bruyere, 

University of Maryland, and AFR (‘‘Greenberger/ 

AFR’’) (Feb. 6, 2013) at 3 (stating that none of the 

definitions of U.S. person proposed by the CFTC are 

sufficient to protect U.S. taxpayers from the risks 

of foreign subsidiaries and affiliates of U.S. 

financial institutions). See also Letter from Sen. 

Levin at 7–8. 

95See, e.g., Cleary (Aug. 16, 2012) at 6; SIFMA 

(Aug. 27, 2012) at A8–9; IIB (Aug. 9, 2012) at 4; 

Deutsche Bank (Aug. 13, 2012) at 2; State Street 

Corporation (‘‘State Street’’) (Aug. 27, 2012) at 2; 

Goldman (Aug. 27, 2012) at 3. 

96See IIB (Aug. 9, 2012) at 4. 

97For purposes of IIB’s definition, a foreign 

branch of a U.S. swap dealer would be considered 

a non-U.S. person. IIB added that it believes that the 

Commission should adopt a final definition of ‘‘U.S. 

person’’ that is consistent with its proposed interim 

definition. Id. 

98See SIFMA (Aug. 25, 2012) at A8. 

99 Id. at A8. 

100See IIAC (Aug. 27, 2012) at 3–5. 

101See Lloyds Banking Group (‘‘Lloyds’’) (Aug. 

24, 2012) at 3; Managed Fund Association and 

Alternative Investment Management Association 

(‘‘MFA/AIMA’’) (Aug. 28, 2012) at 6. 

102See Letter from Sen. Levin at 7–8. 

103 Id. (stating that it ‘‘makes little economic 

sense, given the insubstantial reality of many 

foreign affiliates and subsidiaries in the financial 

industry’’ to ‘‘view a foreign affiliate or subsidiary 

as a non-U.S. person even if it were fully integrated 

with its U.S. parent, operated as a wholly owned 

shell operation with no offices or employees of its 

own, and functioned in the same way as a branch 

or agency office’’). 

104 Id. at 8. 

105See Capital Markets (Aug. 24, 2012) at 5. 

106See SIFMA (Aug. 27, 2012) at A13 and A19. 

2. Comments 

In general, commenters stated that the 

proposed ‘‘U.S. person’’ interpretation 

presented significant interpretive issues 

and implementation challenges.91 The 

commenters contended that it would be 

difficult to determine U.S. person status 

because of the breadth of the proposed 

interpretation, potential ambiguities it 

contains, and the collection of 

information its application may require. 

The commenters, therefore, urged the 

Commission to consider how the 

proposed interpretation could be stated 

in a simpler and more easily applied 

manner.92 While a number of 

commenters stated that the 

Commission’s construction of the term 

‘‘U.S. person’’ in the Proposed Guidance 

was overbroad,93 several commenters on 

the Further Proposed Guidance 

advocated for a broader reading of the 

term than any of those proposed by the 

Commission.94

a. Phase-in Interpretation 

A number of commenters requested 

that the Commission adopt an interim 

interpretation of ‘‘U.S. person’’ that 

would allow firms to rely on their 

existing systems and classifications and 

avoid the need to develop systems to 

follow a temporary interpretation of the 

term ‘‘U.S. person’’ that may change in 

the near future.95 IIB explained that 

applying any interpretation of ‘‘U.S. 

person’’ that departs from status based 

on residence or jurisdiction of 

organization, and in some cases 

principal place of business, will require 

sufficient time to implement relevant 

documentation conventions and 

diligence procedures.96 IIB, therefore, 

requested that the Commission 

implement a phased-in approach to the 

‘‘U.S. person’’ interpretation that would 

encompass, in general, (1) a natural 

person who is a U.S. resident and (2) a 

corporate entity that is organized or 

incorporated under the laws of the 

United States or has its place of 

business in the United States.97

SIFMA also urged the Commission to 

phase in the ‘‘U.S. person’’ 

interpretation, citing the 

implementation difficulties identified 

by IIB. Specifically, SIFMA 

recommended that the Commission 

allow market participants to apply an 

interim interpretation of ‘‘U.S. person’’ 

until 90 days after the final 

interpretation of ‘‘U.S. person’’ is 

published.98 SIFMA stated that the 

interim interpretation—which was 

identical to IIB’s interim 

interpretation—should identify ‘‘core’’ 

U.S. persons and would allow its 

members to phase in compliance with 

the Dodd-Frank requirements without 

building new systems that might have to 

be changed when the Commission states 

a final interpretation of the term.99

b. Comments on Particular Prongs of the 

Proposed Interpretation of the Term 

‘‘U.S. Person’’ 

Commenters’ concerns were primarily 

(though not exclusively) directed to 

three prongs of the proposed ‘‘U.S. 

person’’ interpretation: prong (ii)(B) 

relating to U.S. owners that are 

responsible for the liabilities of a nonU.S. company; prong (iv) relating to 

commodity pools and funds with 

majority-U.S. ownership; and prong (v) 

relating to registered commodity pool 

operators. Below, the Commission 

describes the main comments to all the 

prongs of the proposed interpretation of 

‘‘U.S. person’’ in greater detail. 

Commenters generally did not 

comment on prong (i). 

With respect to prong (ii)(A), the 

Investment Industry Association of 

Canada (IIAC) stated that the 

Commission should look to the location 

of a legal entity’s management (or the 

majority of its directors and executive 

officers), instead of the location of 

organization.100 Two commenters stated 

that the ‘‘principal place of business’’ 

element of the interpretation was 

ambiguous and difficult to administer 

and thus recommended that it be 

removed.101

On the other hand, Senator Levin 

supported an inclusive interpretation of 

the term ‘‘U.S. person’’ that would 

encompass foreign offices and affiliates 

of U.S. financial institutions and 

corporations, because requiring a caseby-case analysis of whether they should 

be subject to the Dodd-Frank Act would 

be complicated, burdensome, and 

susceptible to gamesmanship.102 He also 

suggested that, since it appears that 

typically foreign affiliates and 

subsidiaries operate not as independent 

actors but are closely integrated with 

their parent corporations, obtaining 

from them the financial backing needed 

for their derivative trades, the 

Commission’s interpretation should 

presume that a foreign affiliate engaged 

in swap activity is an extension of the 

parent corporation, unless the parent 

can demonstrate that the foreign affiliate 

should be treated as independent.103

Senator Levin also stated that the 

Commission’s interpretation should 

include as a U.S. person any foreign 

affiliate under common control with a 

U.S. person, based on factors such as 

common management, funding, 

systems, and financial reporting.104

With respect to prong (ii)(B) of the 

interpretation, which addresses 

situations where the direct or indirect 

owners of an entity are responsible for 

its liabilities, several commenters stated 

that the phrase ‘‘responsible for the 

liabilities’’ was vague. For example, the 

Committee on Capital Markets 

Regulation (‘‘Capital Markets’’) stated 

that the phrase ‘‘responsible for the 

liabilities’’ was open to interpretation 

and requested that the Commission 

provide more details regarding its 

interpretation of this phrase.105 SIFMA 

sought clarification on whether the 

Commission intended to capture 

partnerships where the partners have 

unlimited liability.106 The International 

Swaps and Derivatives Association Inc. 

(‘‘ISDA’’) stated that it was not clear 

whether the concept includes 

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107See ISDA (Aug. 27, 2012) at 9; MFA/AIMA 

(Aug. 28, 2012) at 6. 

108See Deutsche Bank (Aug. 27, 2012) at 3. See 

also Peabody Energy Corporation (‘‘Peabody’’)(Aug. 

28, 2012) at 2–3 (‘‘By contrast, a foreign affiliate or 

subsidiary of a U.S. person would be considered a 

non-U.S. person, even where such an affiliate or 

subsidiary has certain or all of swap-related 

obligations guaranteed by the U.S. person.’’) (citing 

Proposed Guidance, 77 FR at 41218); SIFMA (Aug. 

27, 2012) at A2 (stating that the Commission should 

clarify that prong (ii)(B) of the interpretation is not 

meant to capture an entity merely because it is 

guaranteed by a U.S. person). 

109See Sumitomo (Aug. 24, 2012) at 2. 

110See ISDA (Aug. 10, 2012) at 8 (recommending 

that regardless of the nature of the ‘‘responsibilities 

for the liabilities,’’ only direct owners of apparent 

non-U.S. persons should be considered, and that 

the Commission adopt a presumptive control 

threshold of 25% direct ownership for 

distinguishing between control persons and owners 

that need not be considered in assessing the status 

of an entity as a U.S. person). 

111See FSR (Aug. 27, 2012) at 3. 

112See Capital Markets (Aug. 24, 2012) at 5. 

113See FSR (Aug. 27, 2012) at 3. 

114See CEWG, submitted by Sutherland Asbill & 

Brennan LLP (Feb. 25, 2013) at 5. 

115 Id. 

116See ICI (Feb. 6, 2013) at 3. 

117See id. at 2. See also IIB (Feb 6, 2013) at 10– 

11 (collective investment vehicles should be 

excluded from prong (ii) and addressed only in 

prong (iv)). 

118See MFA/AIMA (Feb. 6, 2013) at 7–8. Thus 

under MFA/AIMA’s approach, the status of 

collective investment vehicles would be determined 

by reference to only the tests in alternative prong 

(ii)(B). 

119 Id. at 10–11; Asociacio ́n Bancaria y de 

Entidades Financieras de Colombia (‘‘Colombian 

Bankers’’) (Feb. 6, 2013) at 1–2; IIB (Feb. 6, 2013) 

at 10; ISDA (Feb. 6, 2013) at 5–6. 

120See MFA/AIMA (Feb. 6, 2013) at 12; SIFMA/ 

AMG (Feb. 14, 2013) at 6. ISDA stated that the 

Commission should clarify how the prong would 

apply to an entity where some but not all of the 

owners have unlimited responsibility. In this case, 

the Commission should clarify whether the U.S. 

owners with majority ownership of the entity also 

each must bear unlimited responsibility for the 

entity’s obligations and liabilities or, rather, 

whether it suffices that a single U.S. owner has 

unlimited responsibility once U.S. majority 

ownership is established. See ISDA (Feb. 6, 2013) 

at 5–7. 

121See Greenberger/AFR (Feb. 6, 2013) at 7; 

Better Markets (Feb. 15, 2013) at 7–8. 

122See Greenberger/AFR (Feb. 6, 2013) at 7. 

123See MFA/AIMA (Feb. 6, 2013) at 7; SIFMA, 

The Clearing House, Association LLC (‘‘The 

Clearing House’’), and FSR (‘‘SIFMA/CH/FSR’’) 

(Feb. 6, 2013) at 2, A8–9; ISDA (Feb. 6, 2013) at 5. 

IIB and SIFMA/AMG made similar comments and 

questioned whether extending this prong to entities 

where a majority of indirect owners are U.S. 

persons would be consistent with the ‘‘direct and 

significant connection’’ language in CEA section 

2(i). See IIB (Feb. 6, 2013) at 10; SIFMA/AMG (Feb. 

14, 2013) at 3–4. 

guarantees, sureties, simple risk of loss 

of equity, or other type of exposure.107

Deutsche Bank further noted that the 

language in prong (ii)(B) could be read 

to include an entity guaranteed by a 

U.S. person, which appears at odds with 

possibly varying policies elsewhere in 

the Proposed Guidance for entities 

guaranteed by U.S. persons.108

Commenters also expressed concerns 

about the lack of a minimum U.S.- 

ownership threshold. For example, 

Sumitomo Mitsui Trust Bank Ltd. 

(‘‘Sumitomo’’) stated that there should 

be a minimum level of ownership of the 

entity in question by one or more U.S. 

persons for this prong to apply, and 

suggested that the majority ownership 

threshold used in prong (iv) apply here 

as well.109 ISDA emphasized a different 

point, stating that without clear 

thresholds, a non-U.S. business would 

be within the Commission’s 

interpretation of the term ‘‘U.S. person’’ 

by virtue of even negligible ownership 

interests by U.S. persons.110 The 

Financial Services Roundtable (‘‘FSR’’) 

stated that prong (ii) is overbroad 

because it would cover even minorityU.S. owned institutions based only on a 

pro-rata (or less) parent liability 

guarantee.111

Capital Markets raised a concern that 

whether a conclusion that the direct or 

indirect owners of a U.S. legal entity are 

‘‘responsible for the liabilities’’ of such 

entity requires knowledge of each 

counterparty’s legal and ownership 

structure.112 FSR stated that 

interpretation of prong (ii)(B) would 

depend on a reevaluation of most, if not 

all, counterparty relationships in order 

to determine what type of liability 

guarantees exist between an entity and 

its parent.113 Both Capital Markets and 

FSR stated that firms do not currently 

have any reasonable means to obtain 

information necessary to assess this 

element of the interpretation, 

particularly within the short time frame 

prior to the registration date. 

One commenter supported 

finalization of the alternative prong 

(ii)(B) in the Further Proposed 

Guidance, with minor clarifying 

changes. The Commercial Energy 

Working Group (‘‘CEWG’’) stated that 

the words ‘‘all of’’ should be added to 

clarify that this prong would generally 

apply when U.S. persons that are 

majority owners bear ‘‘unlimited 

responsibility for all of the obligations 

and liabilities of the legal entity 

. . .’’ 114 The CEWG also stated that the 

Guidance should reaffirm that a 

guarantee of a non-U.S. person by a U.S. 

person, in and of itself, generally would 

not invoke U.S. person status.115 Other 

commenters that supported the 

principles of the alternative prong (ii)(B) 

thought that the interpretation of ‘‘U.S. 

person’’ in this regard should be 

restructured. The Investment Company 

Institute (‘‘ICI’’) stated that the 

Commission should clarify that 

collective investment vehicles would 

not fall within the alternative prong 

(ii)(B) because the investors’ liabilities 

are limited to the amount of their 

investment.116 Thus, ICI stated that it 

believes the alternative prong (ii)(B) 

would be superfluous with respect to 

collective investment vehicles because 

the alternative prong (iv) in the Further 

Proposed Guidance would address these 

entities if they are majority-owned by 

U.S. persons.117 MFA/AIMA, on the 

other hand, supported the combination 

of majority ownership and unlimited 

liability elements in the alternative 

prong (ii)(B) and recommended that 

collective investment vehicles be 

considered under that prong.118

Other commenters stated that the 

Commission should clarify that the 

language at the end of the proposed 

alternative prong (ii)(B), which refers to 

limited liability companies and limited 

liability partnerships, would generally 

also apply to other types of entities 

where owners have limited liability but 

where the entities have different names 

in foreign legal jurisdictions.119 MFA/ 

AIMA and SIFMA AMG stated that the 

Commission should clarify how 

frequently an entity should consider 

(e.g., annually) whether U.S. persons are 

its direct or indirect majority owners, 

and provide for a transition period after 

an entity falls within this prong of the 

interpretation for the first time.120

Other commenters were critical of the 

alternative prong (ii)(B). Greenberger/ 

AFR and Better Markets stated that this 

proposed prong is too narrow, because 

it appears to require that U.S. persons be 

both the majority owners of an entity 

and bear unlimited responsibility for the 

entity’s obligations and liabilities, in 

order for the entity to be within the 

Commission’s interpretation of the term 

‘‘U.S. person’’ based solely on 

ownership by U.S. persons.121

Greenberger/AFR pointed out that a U.S. 

person could be the majority owner of 

an entity organized outside the United 

States, and be responsible for 99% of 

the entity’s obligations, yet the entity 

would not fall within the Commission’s 

interpretation under the proposed 

prong.122

Other commenters suggested that the 

alternative prong (ii)(B) is too broad, 

recommending that the ownership 

element be limited to when a majority 

of the direct owners of an entity are U.S. 

persons, because considering the 

indirect ownership of an entity will be 

unworkable for many entities.123 ISDA 

also stated that the concept of 

‘‘unlimited responsibility’’ is too 

amorphous to be a basis for the 

Commission’s interpretation, because it 

could turn on fact-sensitive and 

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124See ISDA (Feb. 6, 2013) at 6. ISDA also stated 

that the Commission should make clear that the 

reference to ‘‘unlimited responsibility’’ does not 

include responsibility arising out of separate 

contractual arrangements or extraordinary 

circumstances, such as conduct by owners that 

results in veil piercing or limited partner 

participation in management of a partnership. See 

id. SIFMA/CH/FSR made similar points and stated 

that this prong is not necessary because market 

participants have not used unlimited liability 

entities to avoid Dodd-Frank regulations. See 

SIFMA/CH/FSR (Feb. 6, 2013) at A12. 

125See ISDA (Feb. 6, 2013) at 6. 

126 Id. at 6–7; SIFMA/CH/FSR (Feb. 6, 2013) at 

A1, A5–6, B5; IIB (Feb. 6, 2013) at 7–8, 10. 

127See MFA/AIMA (Feb. 6, 2013) at 8–9; SIFMA/ 

AMG (Feb. 6, 2013) at A7–8. The Japanese Bankers 

Association made similar comments and stated that 

the Commission should clarify whether the location 

of the principal place of business of a subsidiary 

that is controlled by its parent is the location of the 

subsidiary’s headquarters or the parent’s 

headquarters. Japanese Bankers Association (Feb. 6, 

2013) at 7. 

128See Peabody (Feb. 5, 2013) at 1–2; SIFMA/ 

AMG (Feb. 6, 2013) at 1–3. 

129See, e.g., ISDA (Aug. 10, 2012) at 8; SIFMA 

(Aug. 27, 2012) at A17; Credit Suisse (Aug. 27, 

2012) at 3–4; The Clearing House Association LLC 

(‘‘The Clearing House’’) (Aug. 27, 2012) at 12–13; 

Cleary (Aug. 16, 2012) at 7; IIB (Aug. 27, 2012) at 

6–7. 

130See SIFMA (Aug. 27, 2012) at A17–18. See 

also IIB (Aug. 27, 2012) at 7 (arguing that since 

pools cannot ascertain or control the status of their 

indirect investors, the reference to indirect 

ownership should be removed). 

131SIFMA (Aug. 27, 2012) at A17. 

132See The Clearing House (Aug. 13, 2012) at 15 

n. 20. 

133See, e.g., SIFMA/AMG (Aug. 27, 2012) at 2– 

3; MFA/AIMA (Aug. 28, 2012) at 4–5; ICI (Aug. 23, 

2012) at 4. 

134See Cleary (Aug. 16, 2012) at 6–7. 

135 Id. 

136 Id. IIB also noted that fund sponsors/operators 

verify investor status through subscription materials 

provided at the time of initial investment. 

Therefore, they request that any test based on fund 

ownership apply only to funds formed after the 

effective date of the final ‘‘U.S. person’’ 

interpretation. IIB also agreed that majority 

ownership is the minimum threshold under which 

a foreign fund should be included in the 

interpretation of the term ‘‘U.S. person.’’ See IIB 

(Aug. 27, 2012) at 6–7. 

137See, e.g., SIFMA (Aug. 27, 2012) at A20; ICI 

(Aug. 23, 2012) at 3–7; MFA/AIMA (Aug. 28, 2012) 

at 4; Credit Suisse (Aug. 27, 2012) at 3–4. 

138See ICI (Aug. 23, 2012) at 3. 

139 ICI also noted that certain jurisdictions may 

prohibit disclosure by intermediaries of beneficial 

owner information. Id. 

140See SIFMA (Aug. 27, 2012) at A19–20. 

141See Credit Suisse (Aug, 27, 2012) at 3–4. 

142See Citadel (Feb. 6, 2013) at 1. 

143See id. 

uncertain legal judgments under 

doctrines such as ‘‘veil-piercing’’ or 

‘‘alter ego’’ entities.124 Moreover, ISDA 

asserted that the Commission has not 

justified the treatment of unlimited 

liability entities in the proposed 

alternative prong (ii)(B) by 

demonstrating how such entities are 

more susceptible to being used to evade 

Dodd-Frank regulations or otherwise 

raise the concerns addressed by the 

Commission’s regulations.125

Commenters were also critical of the 

element of the alternative prong (ii)(B) 

that would treat a collective investment 

vehicle as a U.S. person if its principal 

place of business is in the United States. 

They stated that application of this 

element would be very unclear and 

difficult on an operational level.126

Commenters also stated that a collective 

investment vehicle should be treated as 

a U.S. person if it is organized in the 

U.S., not if its manager or operator is in 

the U.S.127

Peabody Energy Corporation 

(‘‘Peabody’’) and SIFMA/AMG stated 

the Commission should adopt the 

interpretation of U.S. person in the 

January Order, which does not include 

all the elements of the proposed 

alternative prong (ii)(B).128

Commenters generally did not 

comment on prong (iii) of the proposed 

interpretation of the term ‘‘U.S. person.’’ 

With respect to prong (iv) relating to 

majority direct- or indirect-owned 

commodity pools, pooled accounts, or 

collective investment vehicles, several 

commenters stated that this prong was 

unworkable because the proposed 

interpretation would require potentially 

unascertainable information.129

According to SIFMA, reliance on 

representations would be the only 

practical way to consider the status of 

counterparties as U.S. persons under 

this prong since other types of 

information, such as the direct and 

indirect ownership of any commodity 

pool, pooled account or collective 

investment vehicle with which a market 

participant transacts, may be 

unavailable, non-public or otherwise 

sensitive.130 Moreover, a fund would be 

required to monitor its level of U.S. 

ownership on an on-going basis, and 

this prong could result in frequent 

changes in the fund’s U.S. person 

status.131 The Clearing House argued 

that the interpretation should not look 

through direct investors to indirect 

investors, unless there is evidence of 

evasion.132 Other commenters 

questioned whether the proposed 

interpretation of ‘‘U.S. person’’ for 

commodity pools, pooled accounts, and 

collective investment vehicles meets the 

‘‘direct and significant’’ jurisdictional 

nexus applicable to the Commission’s 

application of Title VII to transactions 

with such persons.133

Cleary urged that the Commission not 

adopt an interpretation of ‘‘U.S. person’’ 

based on the composition of fund 

ownership, at least prior to finalizing 

the interpretation.134 As it explained, 

even if the Commission’s interpretation 

would allow for reasonable reliance on 

counterparty representations, fund 

counterparties would not be able to 

provide any representation except with 

respect to funds formed after the 

finalization of the interpretation for 

which the fund’s subscription materials 

could have been modified to capture the 

relevant information.135 If the 

Commission nevertheless decided to 

adopt an interpretation based on 

investor composition, Cleary argued 

against including a fund in the 

interpretation on the basis of indirect 

ownership at any level less than a 

majority-ownership.136

Consideration of majority-ownership 

is particularly problematic with respect 

to funds that are publicly traded, 

according to several commenters.137 For 

example, ICI explained that U.S. 

persons typically purchase shares in 

non-U.S. funds through intermediaries, 

and that such shares are registered and 

held in nominee/street name 

accounts.138 In such cases, the fund 

manager/operator would not have 

information regarding the underlying 

investors.139 SIFMA recommended that 

publicly offered and listed commodity 

pools organized in foreign jurisdictions 

be excluded from the interpretation.140

Credit Suisse stated that a fund should 

not be considered a U.S person to the 

extent that it is organized outside the 

United States and is subject to foreign 

regulation that is comparable to U.S. 

law. To the extent the fund is not so 

regulated, then the fund would be 

within the U.S. person interpretation 

only where it is organized under the 

laws of the United States or marketed to 

U.S. residents.141

One commenter strongly supported 

the alternative prong (iv) in the Further 

Proposed Guidance. Citadel stated that 

since the Dodd-Frank clearing and 

reporting requirements will mitigate 

systemic risk, increase transparency and 

promote competition, the U.S. person 

interpretation should encompass 

offshore collective investment vehicles 

that have a sufficient U.S. nexus.142 If it 

did not, then a core, active portion of 

the swaps market would fall outside the 

scope of the transaction level 

requirements, including clearing, which 

would undermine central objectives of 

Dodd-Frank, create opportunities for 

regulatory arbitrage, and risk 

fragmenting the swaps markets.143

Other commenters argued that the 

entities that would be covered by the 

alternative prong (iv) should not be 

covered by the interpretation of ‘‘U.S. 

person,’’ which should cover only 

entities that are directly majority-owned 

by U.S. persons. For example, SIFMA/ 

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144See SIFMA/CH/FSR (Feb. 6, 2013) at A8–9. 

See also IIB (Feb. 6, 2013) at 11 (systems to track 

indirect ownership would be difficult and 

expensive to implement). 

145See SIFMA/CH/FSR (Feb. 6, 2013) at A8–9. 

ISDA stated that the lack of an objective policy 

regarding the interpretation of majority ownership 

would lead to arbitrary or indeterminate results for 

many collective investment vehicles due to their 

varied capital structures (citing, for example, 

structured finance vehicles, which merit further 

analysis due not only to their complex capital 

structures but also to practical difficulties in 

monitoring ownership of their securities), and the 

practical consequences of the alternative 

interpretations can be considered only following a 

more concrete proposal offered for public comment. 

See ISDA (Feb. 6, 2013) at 6–7. 

146MFA/AIMA stated that since interactions 

between collective investment vehicles and 

registered swap dealers are expected to be covered 

by Dodd-Frank requirements or comparable foreign 

regulations, the inclusion of collective investment 

vehicles as ‘‘U.S. persons’’ is less important to 

achieve regulatory coverage. See MFA/AIMA (Feb. 

6, 2013) at 7–8. MFA/AIMA also disputed whether 

the pooling of assets in a collective investment 

vehicle is a fundamental difference that denotes a 

greater U.S. nexus than the pooling of assets by 

corporations or other financial entities, and 

therefore it is problematic that alternative prong (iv) 

is more onerous (in MFA/AIMA’s view) for non-U.S 

collective investment vehicles than alternative 

prong (ii) is for corporate or other financial entities. 

See id. IAA stated that it is inappropriate to define 

an entity as a U.S. person based on characteristics 

of investors in the entity rather than the 

characteristics of the entity itself. See IAA (Feb. 6, 

2013) at 4. 

147See Invesco Advisers Inc. (‘‘Invesco’’) (Feb. 6, 

2013) at 11 (manager of collective investment 

vehicle determines whether to make offering in the 

United States; subsequent purchases by non-U.S. 

persons who have relocated to the U.S. should not 

alone constitute offering in the U.S.); IIB (Feb. 6, 

2013) at 11. Invesco, ICI and IAA each stated that 

the language at the end of alternative prong (iv) (if 

it is adopted) should be interpreted to cover 

collective investment vehicles that are ‘‘publiclyoffered’’ only to non-U.S. persons, even if the 

vehicles are not publicly-traded. See Invesco (Feb. 

6, 2013) at 2; ICI (Feb. 6, 2013) at 3; IAA (Feb. 6, 

2013) at 4. See also ICI (Jul. 5, 2013) at 3 n. 9 

(‘‘There is an important distinction between 

publicly-traded funds and publicly-offered funds: 

publicly-offered funds are those that are broadly 

available to retail investors; publicly-traded funds 

are simply a subset of publicly-offered funds that 

trade on exchanges or other secondary markets. 

Excluding from the U.S. person definition only 

publicly-traded funds would capture only a subset 

of non-U.S. regulated funds. We note that, by 

contrast, hedge funds are neither publicly offered 

nor publicly traded and, unlike non-U.S. retail 

funds, are not subject to substantive government 

regulation and oversight similar in scope to that 

provided by the U.S. Investment Company Act.’’). 

ICI and IAA stated that the Commission should 

interpret whether an offer is made to U.S. persons 

in accordance with precedents under the SEC’s 

Regulation S. See ICI (Feb. 6, 2013) at 4–5 n. 14; 

IAA (Feb. 6, 2013) at 4. ISDA stated that the 

Commission’s interpretation should specifically 

exclude any collective investment vehicle that 

offers its securities in accordance with local law 

and customary documentation practices in a local 

market, as well as offerings conducted in 

accordance with the Regulation S. See ISDA (Feb. 

6, 2013) at 7. 

148See SIFMA/AMG (Feb. 14, 2013) at 4 n. 8; IIB 

(Feb. 6, 2013) at 7; ISDA (Feb. 6, 2013) at 7; 

Japanese Bankers Association (Feb. 6, 2013) at 5. 

149See, e.g., SIFMA (Aug. 27, 2012) at A21; ICI 

(Aug. 23, 2012) at 3–7; IIB (Aug. 9, 2012) at 3; MFA/ 

AIMA (Aug. 28, 2012) at 4–5; IIAC (Aug. 27, 2012) 

at 4, 5. As IIB explained, even a fund that lacks a 

sufficient U.S. connection can be considered a U.S. 

person where its commodity pool operator is 

required to register. IIB (Aug. 9, 2012) at 3. Under 

Commission regulation 3.10, the operator of a nonU.S. fund with even one U.S.-based owner is 

required to register as a commodity pool operator. 

150See SIFMA (Aug. 27, 2012) at A13; ICI (Aug, 

23, 2012) at 4; Cleary (Aug. 16, 2012) at 7; The 

Clearing House (Aug. 27, 2012) at 13–14. 

151See ICI (Aug. 23, 2012) at 5–6. 

152 Id. at 6–7. Regulation S is codified at 17 CFR 

230.901 through 230.905. 

153 IIAC (Aug. 27, 2012) at 4. 

CH/FSR stated that consideration of 

indirect ownership could require 

ongoing monitoring of ownership, 

which is burdensome or even 

impossible, and would not necessarily 

reflect a sufficient jurisdictional nexus 

to the United States.144 SIFMA/CH/FSR 

also stated that if consideration of 

majority ownership is included in the 

interpretation, it should reflect an 

objective statement of the ownership 

level that the Commission would 

consider relevant to U.S.-person status, 

so as to exclude entities that are owned 

by U.S. persons only to a de minimis 

extent and allow an annual 

consideration of ownership.145 MFA/ 

AIMA and the Investment Adviser 

Association (‘‘IAA’’) also provided 

reasons that there is not a sufficient 

jurisdictional nexus with the United 

States to include in the Commission’s 

interpretation of the term ‘‘U.S. person’’ 

collective investment vehicles that are 

indirectly majority-owned by U.S. 

persons.146

Some commenters stated that whether 

a collective investment vehicle would 

be included in the interpretation of U.S. 

person should depend on whether the 

fund or other collective investment 

vehicle is being offered to U.S. persons, 

arguing that the interpretation should 

cover collective investment vehicles 

that are targeted to the U.S. market or 

to U.S. investors by focusing on 

activities within the control of the 

vehicle’s manager.147

Commenters also stated that 

regardless of the policy adopted in this 

regard, in the consideration of whether 

an entity is a U.S. person, only 

information that is available to third 

parties or other parties should be 

considered relevant, and the 

Commission’s policy should 

contemplate that market participants 

would rely on a representation of U.S. 

person status. Also, the Commission’s 

policy should clarify how it would 

apply during the transition period 

immediately after expiration of the 

January Order.148

Addressing prong (v) relating to 

registered commodity pool operators, 

many commenters stated that the 

Commission should not adopt an 

interpretation that looks to the 

registration status of a fund’s operator, 

because this interpretation could 

capture a non-U.S. fund that does not 

itself trigger registration as a commodity 

pool operator and has a minimal U.S. 

nexus.149 A number of commenters 

urged the Commission not to adopt an 

interpretation that looks to the 

nationality of the fund’s manager/ 

operator since this would place U.S.- 

based investment managers at a 

competitive disadvantage, without 

addressing the Commission’s regulatory 

objectives.150 IIB generally agreed with 

these commenters and stated that the 

commodity pool operator registration 

prong would be over-inclusive because, 

under the Commission’s current rules, 

an operator of a foreign pool may be 

required to register as a commodity pool 

operator with less than 50 percent U.S. 

ownership; at the same time, the prong 

also would be under-inclusive because 

it would not cover funds whose 

operators are eligible for relief from 

commodity pool operator registration. 

ICI recommended that the 

Commission, instead, interpret the term 

‘‘U.S. person’’ to include a commodity 

pool, pooled account, or collective 

investment vehicle that is ‘‘offered 

publicly, directly or indirectly’’ by the 

manager/sponsor to U.S. persons.151 As 

ICI explained, this alternative approach 

would base a fund’s U.S. person status 

on more workable considerations, and 

not on changes in investor status that 

are beyond the control of a fund or its 

manager/operator. In the consideration 

of whether a fund is making a public 

offering to U.S. persons, ICI 

recommended that the Commission look 

to SEC Regulation S.152

IIAC recommended that prong (vi) 

relating to pension plans be modified so 

that pension plans designed exclusively 

for foreign employees of a U.S.-based 

entity are not within the interpretation 

of the term ‘‘U.S. person.’’ Further, IIAC 

urged the Commission to clarify that 

U.S. investment advisers or other 

fiduciaries not be considered to be 

within the interpretation of the term 

‘‘U.S. person’’ when they are acting on 

behalf of non-U.S. accounts.153

IIB stated that prong (vii) relating to 

an estate or trust should be replaced, 

explaining that market participants do 

not typically identify an estate’s or 

trust’s regulatory status on the basis of 

its tax status. Instead, it recommended 

that the Commission’s interpretation 

look to the status of the executor, 

administrator, or trustee. Specifically, 

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154 IIB (Aug. 27, 2012) at 14. 

155See, e.g., SIFMA (Aug. 27, 2012); IIB (Aug. 27, 

2012); The Clearing House (Aug. 27, 2012). 

156See SIFMA (Aug. 27, 2012) at A10–11. 

157See IIB (Aug. 27, 2012) at 13–14. 

158See, e.g., SIFMA (Aug. 27, 2012) at A16–17; 

Deutsche Bank (Aug. 27, 2012) at 4; Capital Markets 

(Aug. 24, 2012) at 5; SIFMA/AMG (Aug. 27, 2012) 

at 4–5. 

159SIFMA (Aug. 27, 2012) at A16–18. 

160SIFMA/AMG (Aug. 27, 2012) at 4–5; Cleary 

(Aug. 16. 2012) at 6. 

161See Proposed Guidance, 77 FR at 41218. For 

purposes of this Guidance, the Commission 

generally interprets the term ‘‘affiliates’’ to include 

an entity’s parent entity and subsidiaries, if any, 

unless stated otherwise. 

162 Id. 

163 Id. 

164See Public Citizen’s Congress Watch (‘‘Public 

Citizen’’) (Aug. 14, 2012) at 9–10; IATP (Aug. 27, 

2012) at 4; Better Markets (Aug. 27, 2012) at 6. 

165See Letter from Sen. Levin at 8. 

166See id. (citing Proposed Guidance, 77 FR at 

41218). 

167Public Citizen (Aug. 14, 2012) at 3. 

168 Greenberger (Aug. 27, 2012) at 6–7. 

169See Better Markets (Aug. 27, 2012) at 6–7; 

Public Citizen (Aug. 14, 2012) at 3. 

170See Sullivan & Cromwell (Aug. 13, 2012) at 

A2–3. See also Hong Kong Banks (Aug. 27, 2012) 

at 4. 

IIB recommended that the Commission’s 

interpretation of the term ‘‘U.S. person’’ 

include an estate or trust that is 

organized in the United States ‘‘unless 

(A) an executor, administrator or trustee 

that is not a U.S. person has sole or 

shared investment discretion with 

respect to the assets of the trust or 

estate, (B) in the case of an estate, the 

estate is governed by foreign law and (C) 

in the case of a trust, no beneficiary of 

the trust (and no settlor if the trust is 

revocable) is a U.S. person . . . .’’ 154

c. Commenters’ Proposed Alternatives 

A number of commenters provided 

substantially different alternative 

interpretations of the term ‘‘U.S. 

person.’’ 155 Most notably, the 

commenters’ alternatives would not 

encompass persons by virtue of 

‘‘indirect’’ U.S. ownership. For example, 

SIFMA’s proposed ‘‘U.S. person’’ 

interpretation would include only those 

commodity pools or collective 

investment vehicles that are organized 

or incorporated under U.S. law or are (1) 

directly majority owned by ‘‘U.S. 

persons’’ or, in the case of ownership by 

a pool, a pool that is organized in the 

United States and (2) not publicly 

offered.156 IIB submitted an alternative 

‘‘U.S. person’’ interpretation that 

generally tracked SIFMA’s proposed 

interpretation.157

d. Due Diligence 

Many commenters stated that the 

Commission’s policy in this regard 

should contemplate that a firm would 

reasonably rely on counterparty 

representations regarding their U.S. 

person status.158 For example, SIFMA 

stated that the Commission’s policy 

should be consistent with a 

determination by the swap counterparty 

itself of its U.S.-person status, but in the 

alternative, SIFMA recommended that 

the Commission’s policy contemplate 

reasonable reliance on counterparty 

representations.159 According to these 

commenters, counterparty 

representations are the only practical 

means of determining counterparty 

status as firms do not currently collect 

the information necessary to evaluate 

counterparty status under the proposed 

interpretation. The commenters also 

were concerned that certain prongs of 

the proposed interpretation (e.g., ‘‘lookthrough’’ obligations associated with the 

‘‘direct and indirect ownership’’ 

criterion in prong (iv)) would render it 

difficult, if not impossible, for market 

participants to directly consider 

whether their counterparties would be 

within the Commission’s interpretation 

of the term ‘‘U.S. person.’’ SIFMA and 

Cleary further pointed out that the 

Commission has accepted reasonable 

reliance on counterparty representations 

in the context of the external business 

conduct standards.160

e. Non-U.S. Person That Is Affiliated, 

Guaranteed, or Controlled by U.S. 

Person 

Viewed as a whole, the proposed 

interpretation of the term ‘‘U.S. person,’’ 

would generally not include a non-U.S. 

affiliate of a U.S. person, even if all of 

such affiliate’s swaps are guaranteed by 

the U.S. person.161 The Commission, 

nevertheless, raised a concern regarding 

risks associated with a U.S. person 

providing a guarantee to its non-U.S. 

affiliates and requested comments on 

whether the term ‘‘U.S. person’’ should, 

in fact, be interpreted to generally 

include a non-U.S. affiliate guaranteed 

by a U.S. person.162 In addition, the 

Commission sought comments on 

whether the term ‘‘U.S. person’’ also 

should be interpreted to generally 

include any non-U.S. persons controlled 

by or under common control with a U.S. 

person.163

Responding to the Commission’s 

request for comments on this issue, 

many commenters stated that Title VII 

requires the Commission to interpret the 

term ‘‘U.S. person’’ to include foreign 

affiliates of U.S. persons, and U.S. 

affiliates of foreign persons, in order to 

protect U.S. taxpayers from the risks 

posed by the global swaps market.164

Senator Levin urged that ‘‘[a]t a 

minimum, it is essential that [the 

Guidance] . . . include as a U.S. person 

any foreign affiliate or subsidiary under 

common control with a U.S. person.’’ 165

He also agreed with statements in the 

Proposed Guidance that non-U.S. 

affiliates guaranteed by U.S. persons 

effectively transfer the risks of their 

swaps to the U.S. guarantor, and 

therefore the guaranteed non-U.S. 

affiliates should be subject to U.S. 

safeguards.166 Public Citizen stated that 

not interpreting the term ‘‘U.S. person’’ 

to include a foreign affiliate of a U.S. 

person ‘‘hides the rabbit in the hat’’ for 

Title VII purposes.167 It argued that 

Congress intended financial entities that 

are controlled by U.S. financial 

institutions or that could adversely 

impact the U.S. economy to be regulated 

as U.S. persons under Title VII in order 

to fully protect American taxpayers 

from the threat of ‘‘future financial 

bailouts.’’ 

Greenberger also expressed support 

for including foreign swap entities 

controlled by U.S. parents in the 

interpretation of the term ‘‘U.S. person.’’ 

In his view, the Commission’s 

distinction between guaranteed and 

non-guaranteed foreign subsidiaries is 

arbitrary, as the absence of a U.S. 

guarantee does not insulate the U.S. 

parent from risk exposure.168 Other 

commenters argued that the 

Commission’s interpretation of the term 

‘‘U.S. person’’ should include foreign 

affiliates whose swaps are guaranteed by 

a U.S. person.169

Other commenters objected to 

including a non-U.S. entity in the 

interpretation of the term ‘‘U.S. person’’ 

solely on the basis of affiliation with a 

U.S. person or having its swaps 

guaranteed by a U.S. person. Sullivan & 

Cromwell argued that foreign operations 

of a U.S.-based bank do not have a 

‘‘direct and significant connection with 

activities in, or effect on,’’ U.S. 

commerce based solely on affiliation 

with or guarantee by a U.S. parent 

bank.170 It stated that overseas 

operations usually have a non-U.S. 

orientation (i.e., transactions with nonU.S. counterparties for non-U.S. 

business purposes), and thus the 

connection to U.S. commerce is indirect 

and, further, transactions with non-U.S. 

counterparties will not have a 

significant effect on U.S. commerce. 

Other commenters raised similar 

concerns about the lack of jurisdictional 

nexus. For example, The Clearing House 

stated that the Commission must 

conclude that the risk to the U.S. entity 

is ‘‘significant’’ before designating a 

non-U.S. guaranteed entity a ‘‘U.S. 

person,’’ and further stated that a nonU.S. entity that is subject to local capital 

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171See The Clearing House (Aug. 27, 2012) at 17. 

172See SIFMA (Aug. 27. 2012) at A20. See also 

Australian Bankers (Aug. 27, 2012) at 4 (stating that 

the control concept should not be relevant in the 

definition of ‘‘U.S. person,’’ and while common 

control may potentially indicate common risk, the 

Commission’s focus on the ultimate location of the 

risk is a more relevant to the interpretation of the 

term ‘‘U.S. person.’’). 

173See Japanese Bankers Association (Aug. 27. 

2012) at 8. 

174See End-Users Coalition (Aug. 27, 2012) at 3 

(urging the Commission to exclude a foreign 

affiliate of a U.S. end-user, guaranteed by that enduser, from its interpretation). 

175See Proposed Guidance, 77 FR at 41218. 

176See, e.g., Public Citizen (Aug. 27, 2012) at 5; 

Greenberger (Aug. 27, 2012) at 3; Better Markets 

(Aug. 27, 2012) at 2, 6–7. 

177See Letter from Sen. Levin at 7. 

178See Sullivan & Cromwell (Aug. 13, 2012) at 

A6–7. 

179See Citi (Aug. 27, 2012) at 2–4 (stating that 

foreign branches of U.S.-based swap dealers should 

not be considered ‘‘U.S. persons,’’ but should still 

be subject to the Commission’s Entity-Level and 

Transactional-Level Requirements). See also State 

Street (Aug. 27, 2012) at 3; IIB (Aug. 27, 2012) at 

8. 

180See MFA/AIMA (Aug. 28, 2012) at 8–9. 

181See J.P. Morgan (Aug. 13, 2012) at 9. 

182See IATP (Aug. 27, 2012) at 4. 

183See SIFMA (Aug. 27, 2012) at A15; IIB (Aug. 

27, 2012) at 11–12; EC (Aug. 24, 2012) at 1–2; 

Australian Bankers (Aug. 27, 2012) at 4. 

184See, e.g., The Futures and Options Association 

Ltd. (‘‘FOA’’) (Aug. 13, 2012) at 10–11; SIFMA 

(Aug. 27, 2012); IIB (Aug. 27, 2012); EC (Aug. 24, 

2012). 

185See FIA (Aug. 27, 2012) at 2–3. 

186See SIFMA (Aug. 27, 2012) at A14–15. 

187 Id. 

188 Id. at A21. 

189For purposes of this Guidance, the 

Commission interprets the term ‘‘U.S. person’’ by 

reference to the extent to which swap activities or 

transactions involving one or more such persons 

have the relevant jurisdictional nexus. For example, 

this interpretation would help determine whether 

non-U.S. persons engaging in swap dealing 

transactions with ‘‘U.S. persons’’ in excess of the de 

minimis level would be required to register and be 

regulated as a swap dealer. In addition, for the same 

reasons, the term ‘‘U.S. person’’ can be helpful in 

determining the level of U.S. interest for purposes 

rules or swap dealer registration should 

be excluded from the interpretation of 

‘‘U.S. person.’’ 171 SIFMA, addressing 

the control issue, objected to including 

a non-U.S. person that is controlled by, 

or under common control with, such 

person in the interpretation of the term 

‘‘U.S. person’’ since such control is 

insufficient to satisfy the jurisdictional 

nexus required by section 2(i).172

Japanese Bankers Association did not 

agree that these situations effect a risk 

transfer to the U.S. person, arguing that 

the risk would ultimately be incurred by 

the non-U.S. person and not by the U.S. 

guarantor; thus, it believed that the term 

‘‘U.S. person’’ should not be interpreted 

to include a non-U.S. person guaranteed 

by a U.S. person.173 The Coalition for 

Derivatives End-Users (‘‘End-Users 

Coalition’’) expressed concerns about 

competitive implications, stating that 

imputing U.S. status to a non-U.S. 

person guaranteed by a U.S. person may 

disadvantage the non-U.S. affiliates of 

U.S. end-users, since those non-U.S. 

affiliates may need to be guaranteed to 

enter into swaps with non-U.S. 

counterparties.174

f. Foreign Branch of U.S. Person 

In the Proposed Guidance, the 

Commission stated that a foreign branch 

of a U.S. swap dealer should be 

included in the Commission’s 

interpretation of the term ‘‘U.S. person’’ 

because it is a part, or an extension, of 

a U.S. person.175 Several commenters 

agreed with the Commission’s 

interpretation.176 Senator Levin asserted 

that the ‘‘JP Morgan whale trades 

provide strong factual support for an 

inclusive definition of U.S. person, in 

particular when it comes to the foreign 

branch or agency of a U.S. 

corporation.’’177 Other commenters 

recommended that a foreign branch of a 

U.S. swap dealer be excluded from the 

interpretation. Sullivan & Cromwell 

argued that a foreign branch should not 

be included in the interpretation solely 

on the basis that it is a part of a U.S. 

bank.178 Citi recommended that the 

Commission’s policy should be that a 

foreign branch of a U.S. swap dealer is 

generally considered a non-U.S. person, 

so long as the branch remains subject to 

Entity-Level Requirements and obtains 

substituted compliance for TransactionLevel Requirements for transactions 

with non-U.S. persons.179 In Citi’s view, 

this would address comments by the 

foreign branch’s non-U.S. clients that 

they would have to register as swap 

dealers or MSPs, while assuring that 

such non-U.S. clients’ swaps with the 

foreign branch would generally be 

covered by the Transaction-Level 

Requirements or substituted 

compliance. 

g. Regulation S 

Some commenters believed that the 

Commission’s policy should explicitly 

adopt the SEC’s Regulation S definition 

of a ‘‘U.S. person.’’ MFA/AIMA stated 

that Regulation S eliminates problems 

and inconsistencies in the 

Commission’s proposed 

interpretation.180 J.P. Morgan stated that 

Regulation S would facilitate 

compliance by non-U.S. market 

participants since they are familiar with 

the SEC’s approach.181 On the other 

hand, the Institute for Agriculture and 

Trade Policy (‘‘IATP’’) argued against 

incorporating the Regulation S 

definition, stating that it predates the 

prominence of the swaps market.182

h. Other Clarifications 

A number of commenters voiced 

concerns regarding potential expansion 

of the Commission’s interpretation of 

the term ‘‘U.S. person,’’ which they 

thought could result from the prefatory 

phrase ‘‘includes, but is not limited to,’’ 

and requested that the Commission 

affirmatively state that non-U.S. persons 

are any persons that would not be 

covered by the interpretation of the term 

‘‘U.S. person.’’ 183 A non-exhaustive 

‘‘U.S. person’’ interpretation, they 

contended, would create unnecessary 

uncertainty. 

A number of commenters further 

stated that the interpretation of the term 

‘‘U.S. person’’ should be applied only 

for purposes of the registration and 

regulation of swap dealers and MSPs.184

The Futures Industry Association 

(‘‘FIA’’) argued that the interpretation of 

the term ‘‘U.S. person’’ should not 

extend to those provisions of the CEA 

governing the activities of futures 

commission merchants (‘‘FCMs’’) with 

respect to either exchange-traded 

futures (whether executed on a 

designated contract market or a foreign 

board of trade) or cleared swaps.185

SIFMA similarly requested that the 

Commission clarify that the final 

interpretation of the term ‘‘U.S. person’’ 

does not override existing market 

practice as it relates to futures or FCMs, 

including with respect to clearing.186

SIFMA also requested that the 

Commission clarify that the final 

interpretation of the term ‘‘U.S. person’’ 

for cross-border swaps regulation is the 

single interpretation for all Dodd-Frank 

swaps regulation purposes.187 Finally, 

SIFMA requested that supranational 

organizations, such as the World Bank 

and International Monetary Fund (and 

their affiliates) be excluded from the 

interpretation.188

3. Commission Guidance 

The Commission has carefully 

reviewed and considered the comments 

received and is finalizing a policy that 

will generally set forth an interpretation 

of the term ‘‘U.S. person,’’ as used in 

this Guidance, with certain 

modifications to the proposed definition 

as described below. As explained in the 

Proposed Guidance, the term ‘‘U.S. 

person,’’ as used in the context of CEA 

section 2(i), generally encompasses 

those persons whose activities—either 

individually or in the aggregate—have 

the requisite ‘‘direct and significant’’ 

connection with activities in, or effect 

on, U.S. commerce within the meaning 

of section 2(i).189 The various prongs of 

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of analyzing and applying principles of 

international comity when considering the extent to 

which U.S. transaction-level requirements should 

apply to swap transactions. 

190For clarity, the Commission has reordered the 

prongs of its interpretation of the term ‘‘U.S. 

person.’’ 

191For purposes of this Guidance, the 

Commission would interpret the term ‘‘United 

States’’ to include the United States, its states, the 

District of Columbia, Puerto Rico, the U.S. Virgin 

Islands, and any other territories or possessions of 

the United States government, or enclave of the 

United States government, its agencies or 

instrumentalities. 

192 In this respect, the Commission declines to 

adopt a commenter’s recommendation that IRS 

regulations should be relevant in considering 

whether a person is included in the interpretation 

of the term ‘‘U.S. person.’’ The Commission 

believes that adopting the IRS’s approach in the 

Commission’s policy would be inappropriate; 

rather, consistent with CEA section 2(i), the 

Commission’s interpretation of the term ‘‘U.S. 

person’’ focuses on persons whose swap activities 

meet the ‘‘direct and significant’’ nexus. 

193See Hertz Corp. v. Friend, 559 U.S. 77, 80 

(2010) (determining a corporation’s principal place 

of business for purposes of diversity jurisdiction). 

194 Id. at 92–93. 

195See Further Proposed Guidance, 78 FR at 913. 

196As mentioned in the Introduction, Long-Term 

Capital Portfolio LP, a Cayman Islands hedge fund 

advised by LTCM, collapsed in 1998, leading a 

number of creditors to provide LTCM substantial 

financial assistance under the supervision of the 

Federal Reserve Bank of New York. High level 

officers at LTCM’s offices in Greenwich, 

Connecticut, directed, controlled and coordinated 

the activities of Long-Term Capital Portfolio LP. 

This hedge fund, with approximately $4 billion in 

capital and a balance sheet of just over $100 billion 

had a swap book in excess of $1 trillion notional. 

Federal Reserve Chairman Alan Greenspan testified 

that ‘‘[h]ad the failure of LTCM triggered the seizing 

up of markets, substantial damage could have been 

inflicted on many market participants, including 

some not directly involved with the firm, and could 

have potentially impaired the economies of many 

nations, including our own.’’ Systemic Risks to the 

Global Economy and Banking System from Hedge 

Fund Operations: Hearing Before the House 

Banking and Fin. Services Comm., 105th Cong., 2nd 

sess. (Oct. 1, 1998) (statement of Alan Greenspan, 

Chairman, Federal Reserve), available at 1998 WL 

694498. 

197This discussion regarding the location of a 

collective investment vehicle’s principal place of 

business is solely for purposes of applying 

Commission swaps regulations promulgated under 

Title VII. The Commission does not intend to 

address here the interpretation of ‘‘principal place 

of business’’ for any other purpose. 

198See Gerald T. Lins, et al., Hedge Funds and 

Other Private Funds: Regulation and Compliance 

§ 9:1 (Thomson Reuters 2012–2013 ed. 2012). 

199See note 193 and accompanying text, supra. 

the Commission’s interpretation are 

intended to identify persons for which, 

in practice, the connection or effects 

required by section 2(i) are likely to 

exist and thereby inform the public of 

circumstances in which the Commission 

expects that the swaps provisions of the 

CEA and the Commission’s regulations 

would apply pursuant to the statute. In 

this respect, the Commission will 

consider not only a person’s legal form 

and its domicile (or location of 

operation), but also the economic reality 

of a particular structure or arrangement, 

along with all other relevant facts and 

circumstances, in order to identify those 

persons whose activities meet the 

‘‘direct and significant’’ jurisdictional 

nexus. Below, the Commission 

discusses each prong of its proposed 

interpretation of the term ‘‘U.S. person.’’ 

First, the Commission will include in 

its consideration the elements in prongs 

(i) and (ii)(A), as proposed, renumbered 

as prongs (i) and (iii).190 These prongs 

of the ‘‘U.S. person’’ interpretation 

generally incorporate a ‘‘territorial’’ 

concept of a U.S. person.191 That is, 

these are natural persons and legal 

entities that are physically located or 

incorporated within U.S. territory and, 

consequently, the Commission would 

generally consider swap activities 

involving such persons to satisfy the 

‘‘direct and significant’’ test under 

section 2(i).192 The Commission clarifies 

that it expects that prong (iii) would 

encompass legal entities that engage in 

non-profit activities, as well as U.S. 

state, county and local governments and 

their agencies and instrumentalities. 

Under prong (iii), the Commission 

would generally interpret the term ‘‘U.S. 

person’’ to include also a legal entity 

that is not incorporated in the United 

States if it has its ‘‘principal place of 

business’’ in the United States. The 

Commission intends that this 

interpretation would generally include 

those entities that are organized outside 

the United States but have the center of 

direction, control, and coordination of 

their business activities in the United 

States. 

The concept of an operating company 

having a principal place of business has 

been addressed by the Supreme Court. 

In a recent case, the Supreme Court 

described a corporation’s principal 

place of business as the ‘‘place where 

the corporation’s high level officers 

direct, control, and coordinate the 

corporation’s activities.’’ 193 The 

Supreme Court explained that 

‘‘‘principal place of business’ is best 

read as referring to the place where a 

corporation’s officers direct, control, 

and coordinate the corporation’s 

activities. It is the place that Courts of 

Appeals have called the corporation’s 

‘nerve center.’ And in practice it should 

normally be the place where the 

corporation maintains its 

headquarters—provided that the 

headquarters is the actual center of 

direction, control and coordination, i.e., 

the ‘nerve center,’ and not simply an 

office where the corporation holds its 

board meetings.’’ 194 The Commission 

notes that commenters on the Proposed 

Guidance and Further Proposed 

Guidance generally did not object to the 

inclusion in the interpretation of the 

term ‘‘U.S. person’’ of an entity that has 

its principal place of business in the 

United States. 

The Commission is of the view that 

the application of the principal place of 

business concept to a collective 

investment vehicle may require 

consideration of additional factors 

beyond those applicable to operating 

companies. A collective investment 

vehicle is an entity or group of related 

entities created for the purpose of 

pooling assets of one or more investors 

and channeling these assets to trade or 

invest to achieve the investment 

objectives of the investor(s), rather than 

being a separate, active operating 

business.195 In this context, the 

determination of where the collective 

investment vehicle’s ‘‘high level officers 

direct, control, and coordinate the 

[vehicle’s] activities’’—to apply the 

Hertz decision noted above—can 

involve several different factors.196

The Commission is aware that the 

formation and structure of collective 

investment vehicles involve a great deal 

of variability, including with regard to 

the formation of the legal entities that 

will hold the relevant assets and enter 

into transactions (including swaps) in 

order to achieve the investors’ 

objectives. Legal, regulatory, tax and 

accounting considerations may all play 

a role in determining how the collective 

investment vehicle is structured and the 

jurisdictions in which the legal entities 

will be incorporated.197 Many legal 

jurisdictions around the world have 

promulgated specialized regimes for the 

formation of collective investment 

vehicles, which offer various legal, 

regulatory, tax and accounting 

efficiencies.198

In view of these circumstances, the 

Commission believes that for a 

collective investment vehicle, the 

locations where the relevant legal 

entities have registered offices, hold 

board meetings or maintain books and 

records are generally not relevant in 

determining the principal place of 

business of the collective investment 

vehicle. Instead, as stated in the Hertz 

case cited above, the determination 

should generally depend on the location 

of the ‘‘actual center of direction, 

control and coordination,’’ i.e., the 

‘‘nerve center,’’ of the collective 

investment vehicle. 

Hertz focuses on the place where the 

‘‘high level officers direct, control, and 

coordinate’’ the entity’s activities.199 In 

this regard, the Commission believes 

that the focus should not necessarily be 

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200 In many cases, the entities that comprise the 

collective investment vehicle may not have ‘‘high 

level officers’’ as contemplated by Hertz, and the 

directors of the entities may be individuals who are 

affiliated with a firm that is the legal counsel or 

administrator of the collective investment vehicle 

and who may serve as directors for many different 

vehicles. See Lins, supra note 198, at § 9:4. 

201The Commission understands that the 

collective investment vehicle may obtain the 

services of the relevant personnel through a variety 

of arrangements, including contracting with an 

asset manager that employs the personnel, 

contracting with other employers, or retaining the 

personnel as independent contractors. Thus, in this 

analysis, the Commission would generally expect to 

consider the location of the personnel who 

undertake the relevant activities, regardless of their 

particular employment arrangements. 

202The promoters who form a collective 

investment vehicle may be integral to the ongoing 

success of the collective investment vehicle. In fact, 

the importance of the role played by the promoters 

of a legal entity has long been recognized. See 

generally 1A Fletcher Cyc. Corp. § 189. For 

example, in Old Dominion Copper Mining & 

Smelting Co. v. Bigelow, the court drew upon 

English law in describing the promoters as follows: 

In a comprehensive sense promoter includes 

those who undertake to form a corporation and to 

procure for it the rights, instrumentalities and 

capital by which it is to carry out the purposes set 

forth in its charter, and to establish it as fully able 

to do its business. Their work may begin long before 

the organization of the corporation, in seeking the 

opening for a venture and projecting a plan for its 

development, and it may continue after the 

incorporation by attracting the investment of capital 

in its securities and providing it with the 

commercial breath of life. 

203 Mass. 159, 177 (1909), aff’d, 225 U.S. 111 

(1912). 

Modern law continues to refer to the 

responsibility of promoters of legal entities. See, 

e.g., SEC Form D, instructions to Item 3 (requiring 

information regarding the ‘‘promoters’’ of a 

securities issuer). See also In Re Charles Schwab 

Corp. Sec. Litig., 2010 WL 1261705 (N.D. Cal. Mar. 

30, 2010) (discussing responsibility of ‘‘fund 

managers and promoters’’ to operate a collective 

investment vehicle in accordance with its formation 

documents). 

The Commission generally does not intend that 

when the promoters of a collective investment 

vehicle serve an administrative, purely ministerial 

function of handling the flow of funds from 

investors into the vehicle, the location of these 

personnel would be relevant in this context. 

203The Commission is aware that the boards of 

directors (or equivalent corporate bodies) of the 

legal entities that comprise a collective investment 

vehicle typically have the authority to appoint or 

remove the legal entity’s investment manager, 

administrator, and auditor, and to approve major 

transactions involving the legal entity and the legal 

entity’s audited financial statements. But since 

these functions are not key to the actual 

implementation of the investment objectives of the 

collective investment vehicle, and noting that Hertz 

focuses on the ‘‘high level officers’’ of the entity 

rather than its directors, the Commission would 

generally not view the boards of directors of the 

legal entities to be key personnel for the collective 

investment vehicle. 

204The collective investment vehicle could be a 

hedge fund, a private equity fund, or other type of 

investment fund. The Commission is aware that the 

asset management firm may use any of a variety of 

structures to form the collective investment vehicle, 

which may involve one or more legal entities. In a 

common hedge fund structure, the asset 

management firm forms a legal entity outside the 

United States which holds the collective investment 

vehicle’s assets and is the legal counterparty in its 

investment transactions, including swaps (a 

‘‘master fund’’). If this structure is used, then 

typically the equity of the master fund is held by 

several ‘‘feeder funds,’’ each of which is a separate 

legal entity formed by the asset management firm 

with characteristics that are important to a different 

type of investor. Each investor in the collective 

investment vehicle obtains an equity interest in one 

of the feeder funds and thereby holds an indirect 

interest in the master fund. The Commission 

intends that this Example 1 would encompass, but 

not be limited to, a collective investment vehicle 

using a master/feeder structure such as this. 

on the persons who are named as 

directors or officers of the legal entities 

that comprise the collective investment 

vehicle.200 As noted above, these legal 

entities are merely the legal structure 

through which the investment 

objectives of the collective investment 

vehicle are implemented. Rather, the 

analysis should focus on the persons 

who are the equivalent for the collective 

investment vehicle to the ‘‘high level 

officers’’ of an operating company 

because they direct, control and 

coordinate key functions of the vehicle, 

such as formation of the vehicle or its 

trading and investment. 

The ‘‘high level officers [who] direct, 

control and coordinate’’ the collective 

investment vehicle may be those senior 

personnel who implement the 

investment and trading strategy of the 

collective investment vehicle and 

manage its risks, and the location where 

they conduct the activities necessary to 

implement the investment strategies of 

the vehicle may be its center of 

direction, control and coordination. In 

this regard, the Commission notes that 

the achievement of the investment 

objectives of a collective investment 

vehicle typically depends upon 

investment performance and risk 

management. Investors in a collective 

investment vehicle seek to maximize the 

return on their investment while 

remaining within their particular 

tolerance for risk. Thus, the key 

personnel relevant to this aspect of the 

analysis are those senior personnel 

responsible for implementing the 

vehicle’s investment strategy and its risk 

management. Depending on the 

vehicle’s investment strategy, these 

senior personnel could be those 

responsible for investment selections, 

risk management decisions, portfolio 

management, or trade execution.201

The achievement of a collective 

investment vehicle’s investment 

objectives may be closely linked to its 

formation. Decisions made in the 

structuring and formation of the 

collective investment vehicle may have 

a significant effect on the performance 

of the vehicle. Thus, for purposes of 

identifying the vehicle’s principal place 

of business, the Commission may also 

consider the location of the senior 

personnel who direct, control and 

coordinate the formation of the vehicle 

(i.e., the promoters).202 The location of 

the promoters of the collective 

investment vehicle is relevant, 

particularly where the vehicle has a 

specialized structure or where the 

promoters of the vehicle continue to be 

integral to the ongoing success of the 

fund, including by retaining overall 

control of the vehicle. The location 

where the promoters of the collective 

investment vehicle act to form the 

vehicle and bring it to commercial life 

is relevant in determining the center of 

direction, control and coordination of 

the vehicle, and those promoters may be 

the ‘‘high level officers’’ of the vehicle 

referred to in Hertz.203

Accordingly, the Commission will 

generally consider the principal place of 

business of a collective investment 

vehicle to be in the United States if the 

senior personnel responsible for either 

(1) the formation and promotion of the 

collective investment vehicle or (2) the 

implementation of the vehicle’s 

investment strategy are located in the 

United States, depending on the facts 

and circumstances that are relevant to 

determining the center of direction, 

control and coordination of the vehicle. 

Since the Commission recognizes that 

the structures of collective investment 

vehicles vary greatly, the Commission 

believes it is useful to provide examples 

to illustrate how the Commission’s 

approach could apply to a consideration 

of whether the ‘‘principal place of 

business’’ of a collective investment 

vehicle is in the United States in 

particular hypothetical situations. 

However, because of variations in the 

structure of collective investment 

vehicles as well as the factors that are 

relevant to the consideration of whether 

a collective investment vehicle has its 

principal place of business in the 

United States under this Guidance, 

these examples are for illustrative 

purposes only. In addition, these 

examples are not intended to be 

exclusive or to preclude a determination 

that any particular collective investment 

vehicle has its principal place of 

business in the United States. 

Example 1. An asset management firm 

located in the United States establishes a 

collective investment vehicle outside the 

United States (‘‘Fund A’’).204 Typically, the 

formation of the collective investment 

vehicle by the personnel of the asset 

management firm involves the selection of 

firms to be the administrator, prime broker, 

custodian and placement agent for the 

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205The collective investment vehicle’s 

administrator generally handles day-to-day 

administrative activities, such as operating the 

vehicle’s bank account, issuing payment 

instructions, providing net asset calculations, 

calculating fees, receiving and processing 

subscriptions, preparing accounts, maintaining the 

shareholder register, arranging payments of 

redemption proceeds, coordinating 

communications with shareholders, and overseeing 

anti-money laundering compliance. See id. at § 9:6. 

The prime broker facilitates the execution of the 

vehicle’s investment transactions, including swaps. 

The custodian is responsible for holding the 

vehicle’s assets. The placement agent markets and 

sells shares to investors. 

The Commission generally considers all of these 

functions, although important to the collective 

investment vehicle, to be ministerial functions that 

are generally not relevant to the determination of 

the location of a collective investment vehicle’s 

principal place of business. Thus, even if all of 

these firms and all the personnel performing these 

functions were outside the United States, the 

Commission would nonetheless be inclined to view 

the principal place of business of Fund A as within 

the United States. 

Additional elements that could be relevant to the 

determination include the location of the collective 

investment vehicle’s primary assets, and the 

location of the collective investment vehicle’s 

counterparties. However, the Commission believes 

that the location of these additional elements 

outside the United States should generally not 

preclude an interpretation that the collective 

investment vehicle’s principal place of business is 

in the United States. 

206The Commission notes that elements of 

Example 1 are similar to the facts of a recent court 

case involving a similar issue—the location of a 

collective investment vehicle’s ‘‘center of main 

interest’’ for purposes of bankruptcy law. See Bear 

Stearns, note 7 and accompanying text, supra. In 

Bear Stearns, the collective investment vehicle’s 

‘‘center of main interest’’ was found to be in the 

United States even though its registered office was 

in the Cayman Islands, because it had no employees 

or managers in the Cayman Islands, and its 

investment manager was located in New York. Id., 

374 B.R. at 129–30. The court further observed that 

the administrator that ran the back-office operations 

was in the United States, the collective investment 

vehicle’s books and records were in the United 

States before the foreign proceedings began, and all 

of its liquid assets were located in the United 

States. Id. at 130. In addition, investor registries 

were maintained in Ireland; accounts receivables 

were located throughout Europe and the United 

States; and counterparties to master repurchase and 

swap agreements were based both inside and 

outside the United States—but none were claimed 

to be in the Cayman Islands. Id. 

The Commission believes that Bear Stearns aligns 

with its view that the principal place of business 

of a collective investment vehicle should not be 

determined based on where it is organized or has 

its registered office, but rather should be based on 

an analysis of the relevant facts and circumstances. 

However, the Commission notes that under 

bankruptcy law various factors, particularly factors 

relating to the debtor’s assets and creditors, may be 

relevant to the determination of where a debtor has 

its ‘‘center of main interest’’ for purposes of 

determining whether a U.S. bankruptcy court has 

jurisdiction over the matter. See, e.g., In re SPhinX, 

Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006) (including 

various factors in the determination of center of 

main interest, including the location of the debtor’s 

primary assets and the location of the majority of 

the debtor’s creditors). The Commission believes 

that the factors that are relevant in such bankruptcy 

jurisdictional cases differ from those that are 

relevant to the consideration of whether a collective 

investment vehicle has its principal place of 

business in the United States for purposes of this 

Guidance. 

207The Commission expects that in this example, 

this result would be the same if the asset 

management firm entered into a subadvisory 

agreement with an independent firm that employed 

the personnel in the U.S. office described in this 

example. That is, regardless of whether the U.S. 

personnel are employed by the asset management 

firm or a third party employer, the relevant issue 

is whether the personnel who fulfill the key 

functions relating to its formation or the 

achievement of its investment objectives are located 

in, or outside of, the United States. 

208Legal entities that may be formed with 

separate classes are known in various jurisdictions 

as segregated portfolio companies, protected cell 

companies or segregated accounts companies. A 

collective investment vehicle with a structure such 

as this is typically referred to as a ‘‘hedge fund 

platform’’ or an ‘‘umbrella’’ or ‘‘multi-series’’ hedge 

fund. 

209The Commission expects that the result would 

generally be the same where the assets of Fund C 

are not segregated into separate classes. 

210The Commission believes that Commission 

regulation 140.99, which provides for persons to 

request that the staff of the Commission provide 

written advice or guidance, would be an 

appropriate mechanism for a collective investment 

vehicle to seek guidance as to whether the principal 

place of business of the vehicle is in the United 

States for purposes of applying the Commission 

swaps regulations promulgated under Title VII. 

collective investment vehicle.205 The legal 

entities comprising the collective investment 

vehicle enter into agreements retaining the 

asset management firm as investment 

manager. Personnel of the asset management 

firm who are located in the United States will 

be responsible for implementing Fund A’s 

investment and trading strategy and its risk 

management. Based on the above facts, the 

Commission would be inclined to view the 

principal place of business of Fund A as 

being in the United States,206 and therefore 

each of the legal entities that comprise Fund 

A would be within the interpretation of the 

term ‘‘U.S. person.’’ 

Example 2. An asset management firm 

located outside the United States establishes 

a collective investment vehicle located 

outside the United States (‘‘Fund B’’). 

Personnel of the asset management firm who 

are located outside the United States will be 

responsible for implementing Fund B’s 

investment and trading strategy and its risk 

management. However, personnel in two 

offices of the asset management firm—one of 

which is located outside the United States 

and the other of which is located in the 

United States—will be involved in managing 

Fund B’s investment portfolio. Although the 

personnel in the U.S. office may act 

autonomously on a day-to-day basis, they 

will be under the direction of senior 

personnel in the non-U.S. office regarding 

how they are implementing the investment 

objectives of Fund B. In terms of the asset 

management firm’s internal organization, the 

personnel in the U.S. office report to the 

personnel in the non-U.S. office, who also 

generally hold higher positions within the 

firm. Because the personnel located inside 

the United States merely facilitate the 

implementation of the investment objectives 

of Fund B, for which senior personnel 

outside the United States are responsible, the 

Commission would be inclined to view the 

principal place of business of Fund B as not 

being in the United States.207 As a result, 

assuming that Fund B is not majority-owned 

by U.S. persons (as discussed further below), 

Fund B would not be within the 

interpretation of the term ‘‘U.S. person,’’ and 

none of the legal entities that comprise Fund 

B would be U.S. persons (unless the legal 

entity was actually incorporated or organized 

in the United States). 

Example 3. A financial firm located in the 

United States establishes a collective 

investment vehicle outside the United States 

(‘‘Fund C’’). The collective investment 

vehicle includes a single legal entity 

organized outside the United States, the 

assets of which are segregated into several 

separate classes.208 The U.S. financial firm 

arranges with several unaffiliated investment 

management firms to manage the assets in 

the various classes; an investment 

management firm affiliated with the U.S. 

financial firm may also manage the assets in 

one or more of the classes. Some of these 

investment management firms are located in, 

and others outside, the United States. Under 

the terms of the contracts between Fund C, 

the U.S. financial firm and these investment 

management firms, Fund C has delegated 

responsibility for the overall control of its 

investment strategies to the U.S. financial 

firm that established Fund C, and the U.S. 

financial firm will have rights to reallocate 

Fund C’s assets among the investment 

management firms for various reasons, 

including the U.S. financial firm’s discretion 

regarding Fund C’s investment strategies. 

Based on the above facts, the Commission 

would be inclined to view the principal place 

of business of Fund C as being in the United 

States, even though some of the investment 

managers involved in implementing Fund C’s 

investment and trading strategy are located 

outside the United States. Therefore, Fund C 

(including each of the legal entities that 

comprise Fund C) would be within the 

interpretation of the term ‘‘U.S. person.’’ 209

The Commission recognizes that the 

structures of collective investment 

vehicles are complex and varied, and it 

does not intend to establish bright line 

tests for when the principal place of 

business of a collective investment 

vehicle would or would not be within 

the United States. Rather, the 

Commission’s examples above are 

intended to illustrate the considerations 

that would be relevant to whether a 

collective investment vehicle’s principal 

place of business is in the United States, 

within the framework of reviewing all 

the relevant facts and circumstances.210

The Commission also understands 

that non-U.S. individuals, institutions, 

pension plans or operating companies 

may retain asset management firms in 

the United States to provide a range of 

asset management and other 

investment-related services. Where the 

individual, institution, pension plan or 

operating company is not within any 

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211However, this policy (that non-U.S. persons 

generally do not become U.S. persons solely by 

retaining U.S. asset management firms) would not 

apply to the legal entities comprising a collective 

investment vehicle that is within the interpretation 

of the term ‘‘U.S. person.’’ Rather, those legal 

entities would be within the interpretation of the 

term ‘‘U.S. person’’ for other reasons (e.g., because 

the vehicle has its principal place of business in the 

United States or a majority of its direct or indirect 

owners are U.S. persons)—not solely because they 

had retained a U.S. asset management firm. 

212 In this context, the term ‘‘U.S. person’’ refers 

to those natural persons or legal entities that meet 

prong (i), (ii), (iii), (iv), or (v) of the interpretation 

of ‘‘U.S. person.’’ 

213When Lehman Brothers collapsed in 2008, it 

had a complex web of affiliates. This included 

LBIE, an unlimited liability company in London. At 

that time, it had more than 300 outstanding creditor 

and debtor balances with its affiliates amounting to 

more than $21 billion in total. What happened to 

LBIE is directly relevant to the current discussions 

about cross-border application of swaps reforms, as 

LBIE had more than 130,000 swaps contracts 

outstanding when it failed. Many of the Lehman 

Brothers entities were guaranteed by the parent, 

Lehman Brothers Holdings, in the United States. 

More than $28 billion in client assets and money 

were caught up in the bankruptcy of the UK entity. 

This uncertainty led, further, to a run on many 

other financial institutions when customers feared 

for their positions and collateral housed in overseas 

affiliates of other U.S. financial institutions. See 

Lehman Brothers Progress Report, note 6 and 

accompanying text, supra. 

214Unlimited liability corporations include, 

solely by way of example, entities such as an 

unlimited company formed in the U.K., see Brian 

Stewart, Doing Business in the United Kingdom 

§ 18.02[2][c], or an unlimited liability company 

formed under the law of Alberta, British Columbia, 

or Nova Scotia, see Richard E. Johnston, Doing 

Business in Canada § 15.04[5]. 

215Also, the Commission does not interpret 

section 2(i) to require that it treat a non-U.S. person 

as a ‘‘U.S. person’’ solely because it is controlled 

by or under common control with a U.S. person. 

216See, e.g., Letter from Sen. Levin at 10 (‘‘If a 

U.S.-based parent company provides an implicit or 

explicit guarantee, regardless of the form of the 

guarantee, to a non-U.S. subsidiary or affiliate, the 

risk is effectively transferred to the U.S. person. In 

such circumstances, the exact form of the guarantee 

should not prevent the CFTC from demanding 

compliance with the CFTC’s derivatives 

safeguards.’’). 

217Since a guarantee is treated in law as a 

contract, a guarantor may be protected by legal 

defenses to the enforcement of the contract. Also, 

in some circumstances, a guarantee may not be 

enforceable with respect to underlying obligations 

that are materially altered without the guarantor’s 

consent. See, e.g., Debtor-Creditor Law § 44.04 

(Theodore Eisenberg ed., Matthew Bender 2005). 

218See note 267 and accompanying text, supra, 

for guidance regarding the Commission’s 

interpretation of the term ‘‘guarantee.’’ 

prong of the interpretation of the term 

‘‘U.S. person’’ described in this 

Guidance (including prongs (iii) and (vi) 

which relate to collective investment 

vehicles), then the Commission 

generally believes that the person would 

not come within the ‘‘U.S. person’’ 

interpretation solely because it retains 

an asset management firm located in the 

United States to manage its assets or 

provide other financial services.211

Second, the Commission will include 

in its consideration the elements in the 

alternative version of prong (ii)(B) that 

was described in the Further Proposed 

Guidance (and renumbered in the 

Guidance as prong (vii)). The relevant 

elements in the alternative version are 

whether a legal entity is directly or 

indirectly majority-owned by one or 

more U.S. persons,212 in which one or 

more of these U.S. person(s) bears 

unlimited responsibility for the 

obligations and liabilities of such legal 

entity, and the entity is not a 

corporation, limited liability company, 

limited liability partnership or similar 

entity where shareholders, members or 

partners have limited liability. 

In response to comments on the 

Proposed Guidance, the Commission 

intends that this prong would cover 

entities that are directly or indirectly 

majority-owned by U.S. person(s), but 

not those legal entities that have 

negligible U.S. ownership interests. In 

the Commission’s view, where the 

structure of an entity is such that the 

U.S. owners are ultimately liable for the 

entity’s obligations and liabilities, the 

connection to activities in, or effect on, 

U.S. commerce would generally satisfy 

section 2(i), irrespective of the fact that 

the ownership is indirect. The 

Commission expects that this ‘‘lookthrough’’ aspect of the interpretation 

also would serve to discourage persons 

from engaging in activities outside of 

the Dodd-Frank regulatory regime by 

creating such indirect ownership 

structures. 

In the Commission’s view, where one 

or more U.S. owners has unlimited 

responsibility for losses or 

nonperformance by its majority-owned 

affiliate, there is generally a direct and 

significant connection with activities in, 

or effect on, commerce of the United 

States within the meaning of section 

2(i). Therefore, for purposes of section 

2(i), the majority-owned entity would 

appropriately be considered a ‘‘U.S. 

person.’’ 213 Unlimited liability 

corporations where U.S. persons have 

direct or indirect majority ownership 

and any such U.S. persons have 

unlimited liability for the obligations 

and liabilities of the entity would 

generally be covered under this 

prong.214 By contrast, a limited liability 

corporation or limited liability 

partnership would generally not be 

covered under this prong; the 

Commission also clarifies, in response 

to comments on the Further Proposed 

Guidance, that it intends that entities in 

other jurisdictions that are similar to 

limited liability corporations or limited 

liability partnerships in that none of the 

owners of such entities bear unlimited 

liability for the entity’s obligations and 

liabilities would generally be excluded 

from this prong. 

The Commission has considered the 

comments requesting that the 

interpretation include consideration of 

whether the U.S. person majority 

owners have unlimited responsibility 

for ‘‘all of’’ the obligations and liabilities 

of the entity in connection with this 

prong of the interpretation. The 

Commission believes that even if there 

are some potential obligations and 

liabilities of the entity that may not flow 

to the U.S. persons, the risk of unlimited 

responsibility for other obligations and 

liabilities would generally be a 

sufficient nexus to the United States for 

purposes of section 2(i). Similarly, it 

would generally not be necessary for all 

the U.S. persons who are majority 

owners to bear unlimited responsibility 

(as some commenters suggested). 

Rather, if any of the U.S. persons who 

are direct or indirect majority owners 

bears unlimited responsibility for the 

obligations and liabilities of the entity, 

it would generally be covered by this 

prong of the interpretation. 

In response to requests from 

commenters on the Proposed Guidance, 

the Commission clarifies that it does not 

intend that prong (vii) would cover legal 

entities organized or domiciled in a 

foreign jurisdiction but whose swaps 

obligations are guaranteed by a U.S. 

person.215 To be clear, the Commission 

remains concerned, as explained in the 

Proposed Guidance, about the risks to a 

U.S. guarantor that flow from its 

guarantee of the swaps obligations of an 

entity that is organized or domiciled 

abroad.216 Yet, a guarantee does not 

necessarily provide for ‘‘unlimited 

responsibility for the obligations and 

liabilities of the guaranteed entity’’ in 

the same sense that the owner of an 

unlimited liability corporation bears 

such unlimited liability.217 The 

Commission believes, therefore, that its 

concern regarding the risks associated 

with guarantee arrangements can, 

consistent with CEA section 2(i) and in 

the interests of international comity, 

appropriately be addressed in a more 

targeted fashion without broadly 

treating such guaranteed entities as U.S. 

persons at this time. 

Thus, for example, as set forth below, 

where a non-U.S. affiliate of a U.S. 

person has its swap dealing obligations 

with non-U.S. counterparties guaranteed 

by a U.S. person,218 the guaranteed 

affiliate generally would be required to 

count those swap dealing transactions 

with non-U.S. counterparties (in 

addition to its swap dealing transactions 

with U.S. persons) for purposes of 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45313 

219The term ‘‘U.S. person,’’ as used in this 

context, refers to those natural persons or legal 

entities that meet (i), (ii), (iii), (iv), or (v) of the 

interpretation of ‘‘U.S. person.’’ 

220The ability of the collective investment 

vehicle to rely on the bona fide representation of 

the unrelated investor entity does not affect the due 

diligence that the unrelated investor entity should 

conduct in order to make such representation to the 

collective investment vehicle. 

221The Commission has applied similar antievasion standards in other contexts. See, e.g., 17 

CFR 4.7(a)(1)(iv)(D) (providing that a passive 

investment vehicle will be considered a non-U.S. 

person for purposes of section 4.7 under certain 

circumstances provided that the entity was ‘‘not 

formed principally for the purpose of facilitating 

investment by persons who do not qualify as NonUnited States persons in a pool’’ whose operator is 

claiming relief under that section). 

222See the discussion of due diligence below, 

which the Commission believes is generally 

applicable to the ‘‘due diligence’’ required by the 

collective investment vehicle in this context. 

determining whether the affiliate 

exceeds a de minimis amount of swap 

dealing activity and must register as a 

swap dealer. The Commission notes that 

where a non-U.S. affiliate of a U.S. 

person has its swap dealing obligations 

with non-U.S. counterparties guaranteed 

by a U.S. person, the guarantee creates 

a significant risk transfer into the United 

States. In the absence of such 

guarantees, non-U.S. counterparties may 

be unwilling to enter into swaps with 

such non-U.S. affiliates. As for the 

substantive swaps requirements, as 

discussed below, Transaction-Level 

Requirements generally would apply to 

swaps between a non-U.S. swap dealer 

or non-U.S. MSP on the one hand, and 

a U.S.-guaranteed affiliate on the other 

hand, though such swaps may be 

subject to substituted compliance, as 

appropriate. The Commission generally 

expects that, in considering 

international comity and the factors set 

forth in the Restatement (e.g., the 

character of the activity to be regulated, 

the existence of justified expectations, 

the likelihood of conflicts with 

regulation by foreign jurisdictions), this 

approach would strike a reasonable 

balance in assuring that the swaps 

market is brought under the new 

regulatory regime as directed by 

Congress, consistent with section 2(i) of 

the CEA. 

Third, the Commission will include 

in its interpretation of the term ‘‘U.S. 

person’’ the elements in prong (iii), 

(renumbered as prong (viii)), 

substantially as proposed. Commenters 

did not comment on, nor object to, this 

prong. The Commission clarifies that it 

expects that this prong would 

encompass a joint account where any 

one of the beneficial owners is a U.S. 

person. 

Fourth, the Commission will include 

in its interpretation of the term ‘‘U.S. 

person’’ the elements in the alternative 

prong (iv) that was described in the 

Further Proposed Guidance 

(renumbered in the Guidance as prong 

(vi)), with some modifications. The 

Commission understands from 

commenters that the determination by 

some collective investment vehicles of 

whether they are majority-owned by 

U.S. persons may pose practical 

difficulties. In response to these 

practical difficulties, the Commission 

has eliminated the reference to 

‘‘indirect’’ majority ownership in this 

prong. As revised, this prong no longer 

refers to ‘‘direct or indirect’’ majority 

ownership by U.S. persons. 

Under alternative prong (vi), any 

commodity pool, pooled account, 

investment fund or other collective 

investment vehicle that is majorityowned by one or more U.S. person(s) 219

would be deemed a U.S. person. For 

purposes of this prong, majority-owned 

means the beneficial ownership of more 

than 50 percent of the equity or voting 

interests in the collective investment 

vehicle. The Commission expects that 

the collective investment vehicle would: 

(1) Determine whether its direct 

beneficial owners are U.S. persons 

described in prong (i), (ii), (iii), (iv), or 

(v) of the term ‘‘U.S. person,’’ and (2) 

‘‘look-through’’ the beneficial 

ownership of any other legal entity 

invested in the collective investment 

vehicle that is controlled by or under 

common control with the collective 

investment vehicle in determining 

whether the collective vehicle is 

majority-owned by U.S. persons. 

For example, a limited company is 

formed under the laws of the Cayman 

Island as a collective investment vehicle 

that engages in swap transactions. It has 

a single investor, which is an 

investment company registered with the 

Securities and Exchange Commission 

under the Investment Company Act of 

1940. Shares in the registered 

investment company are only owned by 

United States persons and both the 

Cayman Island limited company and the 

registered investment company are 

sponsored by the same investment 

adviser. The Cayman Island limited 

company would be viewed as a 

‘‘controlled foreign corporation’’ of the 

registered investment company. Because 

the Cayman Island limited company is 

controlled by the same investment 

adviser as the investor registered 

investment company, the Cayman 

Island limited company would be 

required to ‘‘look through’’ the 

registered investment company and 

would be considered majority owned by 

U.S. persons. Therefore, under revised 

prong (vi), the Cayman Island limited 

company generally would be a U.S. 

person, subject to consideration of all 

the facts and circumstances. 

As another example, a limited 

company is formed under the laws of 

the Cayman Island by an investment 

manager as a collective investment 

vehicle that engages in swap 

transactions as part of its investment 

strategy (‘‘Master Fund’’). It has two 

investors, which are also collective 

investment vehicles that were formed by 

the same investment manager for the 

purpose of investing in the Master 

Fund. One investor collective 

investment vehicle is formed under the 

laws of the state of Delaware and the 

other investor collective investment 

vehicle is a limited company formed 

under the laws of the Cayman Island. 

Because Master Fund and the two 

investor collective investment vehicles 

are under common control by the 

investment manager, the Master Fund is 

required to ‘‘look through’’ the two 

investor vehicles to their beneficial 

owners to determine whether it is 

majority owned by U.S. persons. 

Whether the Master Fund is a U.S. 

person will require the assessment of 

whether the majority of its equity is 

held indirectly by U.S. persons through 

the two investor vehicles. 

However, where a collective 

investment vehicle is owned in part by 

an unrelated investor collective 

investment vehicle, the collective 

investment vehicle need not ‘‘look 

through’’ the unrelated investor entity, 

but may reasonably rely upon written, 

bona fide representations from the 

unrelated investor entity regarding 

whether it is a U.S. person,220 unless the 

investee collective investment vehicle 

has reason to believe that such 

unrelated investor entity was formed or 

is operated principally for the purpose 

of avoiding looking through to the 

ultimate beneficial owners of that 

entity.221 The Commission expects that 

the collective investment vehicle would 

take reasonable ‘‘due diligence’’ steps 

with respect to its investors in making 

this determination, along the lines of the 

verifications that the collective 

investment vehicle may conduct in 

connection with other regulatory 

requirements.222

The Commission is also including a 

minor modification to clarify that it 

expects that the interpretation in prong 

(vi) would apply irrespective of whether 

the collective investment vehicle is 

organized or incorporated in the United 

States. Similar to the Commission’s 

analysis with respect to prong (vii) 

discussed above, the Commission’s 

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45314 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

223A collective investment vehicle is an 

arrangement pursuant to which funds of one or 

more investors are pooled together and invested on 

behalf of such investors by a manager. Typically, 

investors do not have day-to-day control over the 

management or operation of the vehicle and are 

essentially passive, beneficial owners of the 

vehicle’s assets. Prior to participating in a collective 

investment vehicle, an investor enters into an 

arrangement with the vehicle which governs the 

fees collected by the manager of the vehicle and the 

investor’s payout from the vehicle, which may 

include periodic payments. Typically a limited 

liability entity such as a corporation, limited 

partnership or limited liability company is used as 

part of the arrangement so that investor liability is 

limited to the investor’s beneficial interest in the 

vehicle’s assets. 

With respect to a swap between a collective 

investment vehicle and a non-U.S. swap dealer, the 

Commission believes that losses borne by the 

vehicle upon a default by the non-U.S. swap dealer 

are better seen as losses incurred by the investors 

in the collective investment vehicle rather than by 

the vehicle itself. In contrast with a collective 

investment vehicle, when an operating company 

enters into a swap with a non-U.S. swap dealer, 

losses borne by the operating company upon a 

default by the non-U.S. swap dealer are better seen 

as losses incurred by the operating company and 

only indirectly by its shareholders. Therefore, prong 

(vi) only relates to collective investment vehicles 

and does not extend to operating companies. 

224The publicly-offered collective investment 

vehicle could be a UCITS (Undertakings for 

Collective Investment in Transferable Securities). 

See Directive 2009/65/EC of the European 

Parliament and of the Council (Jul. 13, 2009), 

available at http://eur-lex.europa.eu/LexUriServ/

LexUriServ.do?uri=OJ:L:2009:302:0032:0096:

EN:PDF. Under the Commission’s interpretation of 

section 2(i), a UCITS would not be included in the 

term ‘‘U.S. person,’’ provided it is not offered, 

directly or indirectly, to U.S. persons. 

policy is that the place of a collective 

investment vehicle’s organization or 

incorporation would not necessarily be 

determinative of its status as a ‘‘U.S. 

person’’ for purposes of CEA section 

2(i). As noted above, collective 

investment vehicles are created for the 

purpose of pooling assets from investors 

and channeling these assets to trade or 

invest in line with the objectives of the 

investors. In the Commission’s view, 

these are generally passive investment 

vehicles that serve as a means to achieve 

the investment objectives of their 

beneficial owners, rather than being 

separate, active operating businesses. As 

such, the beneficial owners would be 

directly exposed to the risks created by 

the swaps that their collective 

investment vehicles enter into.223

Therefore, the Commission’s policy is 

that if U.S. persons beneficially own 

more than 50 percent of the equity or 

voting interests in a collective 

investment vehicle, then the collective 

investment vehicle would ordinarily 

satisfy the ‘‘direct and significant’’ 

standard of CEA section 2(i). 

The Commission is also revising its 

interpretation in prong (vi) to exclude 

non-U.S. publicly-offered, as opposed to 

publicly-traded, collective investment 

vehicles. That is, a collective investment 

vehicle that is publicly offered to nonU.S. persons, but not offered to U.S. 

persons, would generally not be 

included within the interpretation of the 

term U.S. person. This revision is 

intended to address comments that 

publicly-traded funds are only a subset 

of non-U.S. regulated collective 

investment vehicles and that ownership 

verification is expected to be 

particularly difficult for pools, funds, 

and other collective investment vehicles 

that are publicly offered.224

In addition, a collective investment 

vehicle that is publicly offered only to 

non-U.S. persons and not offered to U.S. 

persons generally would not fall within 

any of the prongs of the interpretation 

of the term ‘‘U.S. person.’’ 

Fifth, the Commission will not 

include in its interpretation of the term 

‘‘U.S. person’’ the elements in proposed 

prong (v), which related to registered 

commodity pool operators. The 

Commission agrees with commenters 

that neither the location (nor the 

nationality), nor the registration status, 

of the pool operator would normally, 

without more, be determinative of 

whether the underlying pool(s) should 

be included in its interpretation of the 

term ‘‘U.S. person.’’ The Commission 

has further considered that, as discussed 

above, the relevant elements for a 

commodity pool or other collective 

investment vehicle would generally be 

whether or not its principal place of 

business is in the United States or it is 

majority owned by U.S. persons. The 

Commission believes that proposed 

prong (v) could be overly broad and 

have the effect of capturing commodity 

pools with minimal participation of U.S. 

persons and a minimal U.S. nexus. 

Sixth, the Commission will include in 

its interpretation of the term ‘‘U.S. 

person’’ the elements in prong (vi) 

(renumbered as prong (iv)) relating to 

pension plans. In response to 

comments, though, the Commission is 

clarifying that it does not intend that its 

interpretation encompass pension plans 

that are primarily for foreign employees 

of U.S.-based entities described in prong 

(iii) of the interpretation. Also, as noted 

above in the discussion of collective 

investment vehicles, the Commission 

does not generally expect that a pension 

plan which is not a U.S. person would 

become a U.S. person simply because 

some of the individuals or entities that 

manage the investments of the pension 

plan are located or organized in the 

United States. 

Finally, the Commission will include 

in its interpretation of the term ‘‘U.S. 

person’’ the elements in prong (vii) 

(renumbered as prongs (ii) and (v)) 

pertaining to an estate or trust, with 

certain modifications to take into 

account the views of commenters who 

addressed this issue, and the legal and 

practical considerations that are 

relevant to the treatment of estates and 

trusts for purposes of the Dodd-Frank 

Act. The Commission agrees with the 

commenters who stated that treatment 

of an estate or trust should generally not 

depend on whether the income of the 

estate or trust is subject to U.S. tax. The 

Commission understands that whether 

income is subject to U.S. tax can depend 

on a variety of factors, including the 

source of the income, which may not be 

relevant to whether the Dodd-Frank Act 

should apply to swaps entered into by 

the estate or trust. 

After further consideration, the 

Commission will include in its 

interpretation of the term ‘‘U.S. person’’ 

(a) an estate if the decedent was a U.S. 

person at the time of death and (b) a 

trust if it is governed by the law of a 

state or other jurisdiction in the United 

States and a court within the United 

States is able to exercise primary 

supervision over the administration of 

the trust. For what it expects to be the 

relatively few estates that would use 

swaps (most likely for purposes of 

investment hedging), the Commission 

believes that the treatment of such 

swaps should generally be the same as 

for swaps entered into by the decedent 

during life. If the decedent was a party 

to any swaps at the time of death, then 

those swaps should generally continue 

to be treated in the same way after the 

decedent’s death, when the swaps 

would most likely pass to the decedent’s 

estate. Also, the Commission expects 

that this element of the interpretation 

will be predictable and easy to apply for 

natural persons planning for how their 

swaps will be treated after death, for 

executors and administrators of estates, 

and for the swap counterparties to 

natural persons and estates. 

With respect to trusts, the 

Commission expects that its approach 

would be in line with how trusts are 

treated for other purposes under law. 

The Commission has considered that 

each trust is governed by the laws of a 

particular jurisdiction, which may 

depend on steps taken when the trust 

was created or other circumstances 

surrounding the trust. The Commission 

believes that if a trust is governed by 

U.S. law (i.e., the law of a state or other 

jurisdiction in the United States), then 

it would generally be reasonable to treat 

the trust as a U.S. person for purposes 

of the Dodd-Frank Act. Another relevant 

element in this regard would be whether 

a court within the United States is able 

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225The Commission is aware that one element 

applied by the Internal Revenue Service to 

determine if a trust is a U.S. person for tax purposes 

depends on whether a court within the United 

States is able to exercise primary supervision over 

the administration of the trust. See 26 CFR 

301.7701–7(a)(1)(i). The Commission believes that 

precedents developed under tax law could be 

relevant, as appropriate, in applying this aspect of 

its interpretation of the term ‘‘U.S. person.’’ 

However, the Commission does not intend to 

formally adopt the Internal Revenue Service test for 

this purpose. 

226The Commission does not intend to preclude 

considerations relating to the trustee in determining 

whether the trust is governed by U.S. law or subject 

to the jurisdiction of U.S. courts, if any such 

considerations are relevant. Rather, the Commission 

believes that the status of the trustee would 

generally not be directly relevant to determining if 

a trust should be treated as a U.S. person. 

227See Business Conduct Standards for Swap 

Dealers and Major Swap Participants with 

Counterparties, 77 FR 9734 (Feb. 17, 2012) 

(‘‘External Business Conduct Rules’’). Consistent 

with the ‘‘reasonable reliance’’ standard in the 

External Business Conduct Rules, a swap dealer or 

MSP may rely on the written representations of a 

counterparty to satisfy its due diligence 

requirements. However, a swap dealer or MSP 

should not rely on a written representation if it has 

information that would cause a reasonable person 

to question the accuracy of the representation. In 

other words, a swap dealer or MSP should not 

ignore red flags when relying on written 

representations to satisfy its due diligence 

obligations. Further, if agreed to by the 

counterparty, the written representations may be 

included in counterparty relationship 

documentation. However, a swap dealer or MSP 

may only rely on such representations in the 

counterparty relationship documentation if the 

counterparty agrees to timely update any material 

changes to the representations. In addition, the 

Commission expects swap dealers and MSPs to 

review the written representations on a periodic 

basis to ensure that they remain appropriate for the 

intended purpose. 

228This approach is generally consistent with 

suggestions provided by commenters. For example, 

SIFMA suggested that the determination of whether 

a counterparty is a U.S. person should be made at 

the inception of the swap transaction based on the 

most recent representation from the counterparty, 

which should be renewed by the counterparty once 

per calendar year. See SIFMA (Aug. 27, 2012) at 

A17. 

to exercise primary supervision over the 

administration of the trust.225 The 

Commission expects that including this 

element of the interpretation would 

generally align the treatment of the trust 

for purposes of the Dodd-Frank Act with 

how the trust is treated for other legal 

purposes. For example, the Commission 

expects that if a person could bring suit 

against the trustee for breach of 

fiduciary duty in a U.S. court (and, as 

noted above, the trust is governed by 

U.S. law), then treating the trust as a 

U.S. person would generally be in line 

with how it is treated for other 

purposes. 

The Commission disagrees with 

commenters that the status of an estate 

or trust should be based solely on the 

status of the executor, administrator or 

trustee.226 For one thing, this would 

mean that the treatment of the estate or 

trust could change if, for example, the 

executor or trustee relocates its offices. 

The Commission also does not believe 

it would be appropriate that the 

treatment of a trust would depend solely 

on the identity of the beneficiaries to the 

trust because, among other reasons, the 

beneficiaries may be described as a class 

of persons, rather than particular 

persons. In the Commission’s view, 

more important considerations in 

formulating its policy are whether the 

treatment of the estate or trust is 

predictable and whether it is in line 

with how the entity is treated for other 

purposes. The Commission would also 

consider other facts and circumstances 

related to the estate or trust that could 

be relevant to whether the entity should 

be within the interpretation of the term 

‘‘U.S. person’’ in the context of section 

2(i). 

a. Due Diligence 

As described above, many 

commenters indicated that the 

information necessary to accurately 

assess the status of their counterparties 

as U.S. persons may not be available, or 

may be available only through overly 

burdensome due diligence, particularly 

where the interpretation includes a 

‘‘look-through’’ element that considers 

‘‘direct and indirect’’ ownership. For 

this reason, these commenters requested 

that the Commission’s policy 

contemplate reasonable reliance on 

counterparty representations as to the 

relevant elements of the interpretation 

of the term ‘‘U.S. person.’’ 

The Commission agrees with the 

commenters that a party to a swap 

should generally be permitted to 

reasonably rely on its counterparty’s 

written representation in determining 

whether the counterparty is within the 

Commission’s interpretation of the term 

‘‘U.S. person.’’ In this context, the 

Commission’s policy is to interpret the 

‘‘reasonable’’ standard to be satisfied 

when a party to a swap conducts 

reasonable due diligence on its 

counterparties, with what is reasonable 

in a particular situation to depend on 

the relevant facts and circumstances. 

The Commission notes that under the 

External Business Conduct Rules, a 

swap dealer or MSP generally meets its 

due diligence obligations if it reasonably 

relies on counterparty representations, 

absent indications to the contrary.227 As 

in the case of the External Business 

Rules, the Commission believes that 

allowing for reasonable reliance on 

counterparty representations encourages 

objectivity and avoids subjective 

evaluations, which in turn facilitates a 

more consistent and foreseeable 

determination of whether a person is 

within the Commission’s interpretation 

of the term ‘‘U.S. person’’ and the extent 

to which the Title VII requirements 

apply to certain cross-border 

activities.228

b. Foreign Branch of U.S. Person 

The Commission is confirming its 

interpretation, as proposed, that a 

foreign branch of a U.S. person is itself 

a ‘‘U.S. person.’’ As the Commission 

explained in the Proposed Guidance, a 

branch does not have a legal identity 

separate from that of its principal entity. 

In this respect, the Commission notes 

that branches are neither separately 

incorporated nor separately capitalized 

and, more generally, the rights and 

obligations of a branch are the rights 

and obligations of its principal entity 

(and vice versa). Under these 

circumstances, the Commission views 

the activities of a foreign branch as the 

activities of the principal entity, and 

thus a foreign branch of a U.S. person 

is a U.S. person. 

Accordingly, the Commission 

declines to recognize foreign branches 

of U.S. persons separately from their 

U.S. principal for purposes of 

registration. That is, if the foreign 

branch were to be a swap dealer or MSP, 

as discussed further below, the U.S. 

person would be required to register, 

and the registration would encompass 

the foreign branch. Upon consideration 

of principles of international comity and 

the factors set forth in the Restatement, 

though, the Commission has calibrated 

the requirements otherwise applicable 

to such foreign branches in respects 

other than broadly excluding them from 

the U.S. person interpretation. For 

example, as discussed further below, 

foreign branches of U.S. persons may 

comply with Transaction-Level 

Requirements through substituted 

compliance, where appropriate, with 

respect to swaps with foreign 

counterparties, as well as with a foreign 

branch of another U.S. person. Further, 

non-U.S. persons may exclude swaps 

with foreign branches of registered swap 

dealers for purposes of determining 

whether they have exceeded the de 

minimis level of swap dealing activity 

under the swap dealer definition. 

The types of offices the Commission 

would consider to be a ‘‘foreign branch’’ 

of a U.S. bank, and the circumstances in 

which a swap is with such foreign 

branch, are discussed further below in 

section C below. 

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45316 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

229See, e.g., MFA/AIMA (Aug. 28, 2012) at 4, 8– 

9; IIAC (Aug. 27, 2012) at 3; J.P. Morgan (Aug. 27, 

2012) at 3, 8–9; SocGen (Aug. 8, 2012) at 5; ISDA 

(Aug. 10, 2012) at 9. See also IIB (Aug. 9, 2012) at 

3 (noting that the proposed interpretation is more 

expansive than other Commission and SEC 

definitions of ‘‘U.S. person’’ and makes it difficult 

to assess U.S. person status). Regulation S is 

codified at 17 CFR 230.901 through 230.905. 

230See 17 CFR 230.902(k)(2)(v). 

231See Offshore Offers and Sales, 55 FR 18306 

(May 2, 1990). 

232See 17 CFR 230.902(k)(1)(viii). Also, the 

exception from the Regulation S definition of ‘‘U.S. 

person’’ is not available if any of such accredited 

investors are natural persons, estates or trusts. Id. 

233These factors are among those relevant to 

whether a country has a basis to assert jurisdiction 

over an activity under the Restatement. See 

generally note 86 and accompanying text, supra. 

234See, e.g., Goldman (Aug. 27, 2010) at 3, FOA 

(Aug. 13, 2012) at 10–11; SIFMA (Aug. 27, 2012) 

at A14–15, FIA (Aug. 27, 2012) at 2–5. 

235The Commission believes that Commission 

regulation 140.99, which provides for persons to 

request that the staff of the Commission provide 

written advice or guidance, would be an 

appropriate mechanism for a person to seek 

guidance as to whether it is a U.S. person for 

purposes of applying the Commission swaps 

regulations promulgated under Title VII. 

c. Regulation S 

The Commission has considered the 

recommendation by several commenters 

that the Commission follow, entirely or 

to some extent, the definition of ‘‘U.S. 

person’’ in the SEC’s Regulation S.229

With respect to the treatment of foreign 

branches in particular, Regulation S 

excludes from its definition of ‘‘U.S. 

person’’ any agency or branch of a U.S. 

person located outside the United States 

if (1) the agency or branch operates for 

valid business reasons; and (2) the 

agency or branch is engaged in the 

business of insurance or banking, and is 

subject to substantive insurance or 

banking regulation in the jurisdiction 

where it is located.230 As the 

Commission noted in the Proposed 

Guidance, however, Regulation S 

addresses the level of activities (i.e., 

offerings of securities) conducted within 

the United States, and related customer 

protection issues.231 As such, the 

regulation’s territorial approach to 

determining U.S. person status is, in the 

Commission’s view, unsuitable for 

purposes of interpreting section 2(i), 

which addresses the connection with 

activities in and the risks to U.S. 

commerce arising from activities outside 

the United States. 

Similarly, Regulation S and the DoddFrank swaps provisions also serve 

fundamentally different regulatory 

objectives with respect to the treatment 

of collective investment vehicles. Under 

Regulation S, the SEC will consider 

certain investment funds and securities 

issuers that are organized in foreign 

jurisdictions, but owned by U.S. 

investors, to be U.S. persons unless the 

U.S. investors are accredited 

investors.232 The accredited investor 

condition provides a level of assurance 

that U.S. investors are entities that 

understand the consequences of 

investing through a foreign entity and, 

in effect, may be deemed to have waived 

the benefits of the U.S. securities laws. 

In contrast, the focus of Title VII is not 

limited to customer protection. Whether 

or not the investors in a collective 

investment vehicle are accredited 

investors, in the Commission’s view, is 

irrelevant; rather, under section 2(i), the 

focus is whether the swap activities of 

a collective investment vehicle have a 

direct and significant connection with 

activities in, or effect on, U.S. 

commerce. 

The Commission understands that the 

Regulation S definition of ‘‘U.S. person’’ 

is generally understood and applied by 

market participants. However, as the 

foregoing examples demonstrate, the 

Regulation S definition of ‘‘U.S. person’’ 

could fail to capture persons whose 

activities, the Commission believes, 

meet the ‘‘direct and significant’’ 

jurisdictional test of CEA section 2(i)— 

and whose activities present the type of 

risk that Congress addressed in Title VII. 

This potential for underinclusion, 

together with the fact that the 

Commission has addressed commenter 

concerns by providing further details 

and guidance about its interpretation of 

the term ‘‘U.S. person,’’ which the 

Commission expects will facilitate a 

more consistent understanding of that 

term among market participants, 

provides the basis for not importing the 

Regulation S definition into the 

Commission’s interpretation of CEA 

section 2(i). 

d. Other Clarifications 

The Commission continues to include 

the prefatory phrase ‘‘include, but not 

be limited to’’ in its interpretation of the 

term ‘‘U.S. person,’’ as it appeared in 

the Proposed Guidance. While the 

Commission’s policy generally is to 

limit its interpretation of this term, for 

purposes of this Guidance, to persons 

encompassed within the several prongs 

discussed above, the Commission also 

expects that there may be circumstances 

that are not fully addressed by those 

prongs, or other situations where the 

interpretation discussed above does not 

appropriately resolve whether a person 

should be included in the interpretation 

of the term ‘‘U.S. person.’’ Thus, the 

Commission continues to include the 

prefatory phrase to indicate that there 

may be situations where a person not 

fully described in the interpretation 

above is appropriately treated as a ‘‘U.S. 

person’’ for purposes of this Guidance 

in view of the relevant facts and 

circumstances and a balancing of the 

various regulatory interests that may 

apply. In these situations, the 

Commission anticipates that the 

relevant facts and circumstances may 

generally include the strength of the 

connections between the person’s swaprelated activities and U.S. commerce; 

the extent to which such activities are 

conducted in the United States; the 

importance to the United States (as 

compared to other jurisdictions where 

the person may be active) of regulating 

the person’s swap-related activities; the 

likelihood that including the person 

within the interpretation of ‘‘U.S. 

person’’ could lead to regulatory 

conflicts; and considerations of 

international comity.233 The 

Commission anticipates that it would 

also likely be helpful to consider how 

the person (and in particular its swap 

activities) is currently regulated, and 

whether such regulation encompasses 

the person’s swap activities as they 

relate to U.S. commerce. 

Finally, in response to commenters’ 

requests for clarification regarding the 

scope of the applicability of the ‘‘U.S. 

person’’ interpretation,234 the 

Commission confirms that its policy is 

to apply its interpretation of the term 

‘‘U.S. person’’ only to swaps regulations 

promulgated under Title VII, unless 

provided otherwise in any particular 

regulation. Therefore, for example, the 

Commission does not intend that this 

Guidance address how the term 

‘‘person’’ or ‘‘U.S. person’’ should be 

interpreted in connection with any 

other CEA provisions or Commission 

regulations promulgated thereunder. 

4. Summary 

In summary, for purposes of the 

application of CEA section 2(i), the 

Commission will interpret the term 

‘‘U.S. person’’ generally to include, but 

not be limited to: 235

(i) Any natural person who is a resident of 

the United States; 

(ii) any estate of a decedent who was a 

resident of the United States at the time of 

death; 

(iii) any corporation, partnership, limited 

liability company, business or other trust, 

association, joint-stock company, fund or any 

form of enterprise similar to any of the 

foregoing (other than an entity described in 

prongs (iv) or (v), below) (a ‘‘legal entity’’), 

in each case that is organized or incorporated 

under the laws of a state or other jurisdiction 

in the United States or having its principal 

place of business in the United States; 

(iv) any pension plan for the employees, 

officers or principals of a legal entity 

described in prong (iii), unless the pension 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45317 

236See Proposed Guidance, 77 FR at 41218– 

41219. 

237 Id. 

238 Id. at 41218–20. 

239 Id. at 41221. 

240One commenter, Japanese Bankers 

Association, stated that the cross-border application 

of Dodd-Frank is overbroad because it would 

capture even hedging transactions made by a nonU.S. swap dealer with a U.S. swap dealer that is 

making a market. The definition of ‘‘dealing 

activity’’ is ambiguous, this commenter asserted, 

and might require the non-U.S. swap dealer to 

register. See Japanese Bankers Association (Aug. 27, 

2012) at 1. 

241See, e.g., Goldman (Aug. 27, 2012) at 5; ISDA 

(Aug. 10, 2012) at 12 (stating that, in the typical 

case, an intra-group guarantee allocates risks and 

activities within the corporate group and is not a 

dealing activity of the non-U.S. person); CEWG 

(Aug. 27, 2012) at 6–7 (stating that the Proposed 

Guidance should not include swap guarantees for 

aggregation purposes because it is contrary to the 

Final Entities Rules; jurisdiction should not be 

extended to transactions between two non-U.S. 

persons if the swaps obligations of one party are 

guaranteed by a U.S. person because U.S. 

jurisdiction in these circumstances is not supported 

by law or existing conventions of international 

jurisdiction). 

242SIFMA (Aug. 27, 2012) at A29. 

plan is primarily for foreign employees of 

such entity; 

(v) any trust governed by the laws of a state 

or other jurisdiction in the United States, if 

a court within the United States is able to 

exercise primary supervision over the 

administration of the trust; 

(vi) any commodity pool, pooled account, 

investment fund, or other collective 

investment vehicle that is not described in 

prong (iii) and that is majority-owned by one 

or more persons described in prong (i), (ii), 

(iii), (iv), or (v), except any commodity pool, 

pooled account, investment fund, or other 

collective investment vehicle that is publicly 

offered only to non-U.S. persons and not 

offered to U.S. persons; 

(vii) any legal entity (other than a limited 

liability company, limited liability 

partnership or similar entity where all of the 

owners of the entity have limited liability) 

that is directly or indirectly majority-owned 

by one or more persons described in prong 

(i), (ii), (iii), (iv), or (v) and in which such 

person(s) bears unlimited responsibility for 

the obligations and liabilities of the legal 

entity; and 

(viii) any individual account or joint 

account (discretionary or not) where the 

beneficial owner (or one of the beneficial 

owners in the case of a joint account) is a 

person described in prong (i), (ii), (iii), (iv), 

(v), (vi), or (vii). 

Under this interpretation, the term 

‘‘U.S. person’’ generally means that a 

foreign branch of a U.S. person would 

be covered by virtue of the fact that it 

is a part, or an extension, of a U.S. 

person. 

For convenience of reference, this 

Guidance uses the terms ‘‘U.S. swap 

dealer’’ and ‘‘U.S. MSP’’ to refer to swap 

dealers and MSPs, respectively, that are 

within the Commission’s interpretation 

of the term ‘‘U.S. person’’ under this 

Guidance. The terms ‘‘non-U.S. swap 

dealer’’ and ‘‘non-U.S. MSP’’ refer to 

swap dealers and MSPs, respectively, 

that are not within the Commission’s 

interpretation of the term ‘‘U.S. person’’ 

under this Guidance; and the term 

‘‘non-U.S. person’’ refers to a person 

that is not within the Commission’s 

interpretation of the term ‘‘U.S. person’’ 

under this Guidance. 

B. Registration 

1. Proposed Guidance 

Under section 2(i) of the CEA, the 

Dodd-Frank swaps provisions, 

including the swap dealer and MSP 

registration provisions, do not apply to 

activities overseas unless such activities 

have a ‘‘direct and significant 

connection with activities in, or effect 

on,’’ U.S. commerce. In the Proposed 

Guidance, the Commission addressed 

the general manner in which a person’s 

overseas swap dealing activities or 

positions may require registration as a 

swap dealer or MSP, respectively. 

Specifically, under the Proposed 

Guidance, the Commission would 

expect that a non-U.S. person whose 

swap dealing transactions with U.S. 

persons exceed the de minimis 

threshold would register as a swap 

dealer.236 Likewise, under the Proposed 

Guidance, the Commission would 

expect that a non-U.S. person who holds 

swaps positions where one or more U.S. 

persons are counterparties above the 

specified MSP thresholds would register 

as an MSP.237 As explained in the 

Proposed Guidance, the Commission 

believes that, consistent with section 

2(i), the level of swap dealing or 

positions that is sufficient to require a 

person to register as a swap dealer or 

MSP when conducted by a person 

located in the United States would 

generally also meet the ‘‘direct and 

significant’’ nexus when such activities 

are conducted by a non-U.S. person 

with a U.S. person and in some other 

limited circumstances. 

In the consideration of whether a nonU.S. person is engaged in more than a 

de minimis level of swap dealing, the 

Proposed Guidance would generally 

include the notional value of any swaps 

between such non-U.S. person (or any of 

its non-U.S. affiliates under common 

control) and a U.S. person (other than a 

foreign branch of a registered swap 

dealer).238 Further, where the potential 

non-U.S. swap dealer’s obligations are 

guaranteed by a U.S. person, the 

Commission would expect that the nonU.S. person would register with the 

Commission as a swap dealer when the 

aggregate notional value of its swap 

dealing activities (along with the swap 

dealing activities of its non-U.S. 

affiliates that are under common control 

and also guaranteed by a U.S. person) 

with U.S. persons and non-U.S. persons 

exceeds the de minimis threshold. 

Additionally, the Proposed Guidance 

clarified that the Commission would not 

expect a non-U.S. person without a 

guarantee from a U.S. person to register 

as a swap dealer if it does not engage in 

swap dealing with U.S. persons as part 

of ‘‘a regular business’’ with U.S. 

persons, even if the non-U.S. person 

engages in dealing with non-U.S. 

persons. 

Following a similar rationale, under 

the Proposed Guidance if a non-U.S 

person holds swaps positions above the 

requisite threshold, the Commission 

would expect such non-U.S. person to 

register as an MSP. In considering 

whether a non-U.S. person that is a 

potential MSP meets the applicable 

threshold, under the Proposed 

Guidance, the non-U.S. person would 

have included the notional value of: (1) 

any swaps entered into between such 

non-U.S. person and a U.S. person 

(provided that if the non-U.S. person’s 

swaps are guaranteed by a U.S. person, 

then such swaps will be attributed to 

the U.S. guarantor and not the potential 

non-U.S. MSP); and (2) any swaps 

between another non-U.S. person and a 

U.S. person if the potential non-U.S. 

MSP guarantees the obligations of the 

other non-U.S. person thereunder.239

2. Comments 

In general, commenters on the 

Proposed Guidance did not raise 

concerns or objections to the 

Commission’s interpretation that nonU.S. persons who engage in more than 

a de minimis level of swap dealing with 

U.S. persons should be expected to 

register as swap dealers.240 A number of 

commenters argued, however, that a 

non-U.S. person should not be expected 

to register as a swap dealer solely by 

reason of being guaranteed by a U.S. 

person.241 SIFMA stated that the 

‘‘connection between a non-U.S. swap 

dealing entity and its U.S. guarantor 

creates too tenuous a nexus to justify 

registration on the basis of this 

relationship alone.’’ 242 As an 

alternative, SIFMA posited that only 

guarantees by a U.S. person for which 

there is a material likelihood of payment 

by the U.S. guarantor should be counted 

towards the de minimis calculation. To 

implement this recommendation, 

SIFMA suggested that the Commission 

establish how to determine whether the 

likelihood of payment is remote, such as 

a comparison of the aggregate 

contingent liability of the U.S. person 

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45318 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

243 Id. at A29–30. 

244 Goldman (Aug 27, 2012) at 5. See also CEWG 

(Aug. 27, 2012) 6–7 (stating that because there is no 

legal basis under section 2(i) for asserting 

jurisdiction based on a guaranty, the Commission 

should amend the Proposed Guidance to clarify that 

a non-U.S. person is not subject to Commission 

regulation, even where a U.S. person guarantees 

either counterparty; swap dealing activity outside 

the United States that does not involve a U.S. 

person should not be subject to the Commission’s 

jurisdiction; guarantees do not alter the location of 

activity, nor should they alter a participant’s 

residency); Hong Kong Banks (Aug. 27, 2012) at 8 

(arguing that swaps between non-U.S. persons 

should be excluded from the de minimis 

determination regardless of whether a counterparty 

is guaranteed). 

245 ISDA (Aug. 10, 2012) at 12. 

246Australian Bankers (Aug. 27, 2012) at 4. 

247 IIAC (Aug. 27, 2012) at 6, 8. 

248 J.P. Morgan (Aug. 27, 2012) at 10. 

249See Further Definition of ‘‘Swap,’’ ‘‘SecurityBased Swap,’’ and ‘‘Security-Based Swap 

Agreement’’; Mixed Swaps; Security-Based Swap 

Agreement Recordkeeping; Final Rule, 77 FR 48208 

(Aug. 13, 2012) (‘‘Final Swap Definition’’). 

250CEWG (Aug. 27, 2012) at 5. 

251Letter from Sen. Levin at 10. 

252 Id. at 11. 

253Letter from Senators Blumenthal, Boxer, 

Feinstein, Harkin, Levin, Merkley, Shaheen, and 

Warren (Jul. 3, 2013). 

254AFR (Aug. 27, 2012) at 4. 

255 Id. at 4. 

256As discussed in greater detail below, in light 

of the global nature of the swaps markets, the 

Commission’s policy is to interpret the aggregation 

requirement in Commission regulation 1.3(ggg)(4) 

in a manner that applies the same aggregation 

principles to all affiliates in a corporate group, 

whether they are U.S. or non-U.S. persons. 

257See note 267 and accompanying text, supra, 

for guidance regarding the Commission’s 

interpretation of the term ‘‘guarantee.’’ 

258When a non-U.S. person generally would be 

considered to be an affiliate conduit is discussed 

below in section G. As discussed below, for the 

purposes of the Commission’s interpretation of CEA 

section 2(i), the Commission believes that certain 

factors are relevant to considering whether a nonU.S. person is an ‘‘affiliate conduit.’’ Such factors 

include whether: The non-U.S. person is a majorityowned affiliate of a U.S. person; the non-U.S. 

person is controlling, controlled by or under 

common control with the U.S. person; the financial 

results of the non-U.S. person are included in the 

consolidated financial statements of the U.S. 

person; and the non-U.S. person, in the regular 

course of business, engages in swaps with non-U.S. 

third-parties for the purpose of hedging or 

mitigating risks faced by, or to take positions on 

behalf of, its U.S. affiliate(s), and enters into 

guarantor to the net equity of that 

guarantor.243

Similarly, Goldman argued that it 

would be inconsistent with the DoddFrank Act to expect non-U.S. persons to 

register as swap dealers solely on the 

basis of guarantees by a U.S. parent, 

absent any showing of a ‘‘direct and 

significant’’ jurisdictional nexus. 

Goldman recommended that any 

concerns regarding potential evasion of 

the registration requirement be 

addressed through the Commission’s 

exercise of its anti-evasion authority.244

ISDA agreed, suggesting that rather than 

protecting the U.S. guarantor by 

encouraging swap dealer registration of 

the guaranteed non-U.S. person, a better 

course is addressing the question of 

when (if ever) the U.S. guarantor must 

register as a swap dealer.245 Australian 

Bankers stated that the considerations 

relevant to whether a non-U.S. person 

(without a guarantee from a U.S. 

affiliate) is expected to register as a 

swap dealer should relate to the 

aggregate notional amount of swap 

dealing activities with U.S. persons 

within a particular asset class.246

IIAC requested that the Commission 

confirm that a guarantee by a foreign 

holding company would not be deemed 

to be a guarantee by all of its 

subsidiaries, including U.S. entities, 

solely as a result of the indirect 

ownership.247 J.P. Morgan raised 

concerns regarding the scope of the 

interpretation of the term a ‘‘guarantee.’’ 

Specifically, it argued that the term 

‘‘guarantee’’ should not be interpreted to 

include keepwells and liquidity puts 

because these agreements do not create 

the same types of third-party rights as 

traditional guarantees and may be 

unenforceable by third parties.248 CEWG 

objected to the broader interpretation of 

the term ‘‘guarantee’’ in the Proposed 

Guidance than under the Final Product 

Definitions Rules,249 stating that the 

Commission ‘‘must undertake a more 

thorough regulatory analysis with 

respect to guarantees of swaps 

obligations.’’ 250

On the other hand, Senator Levin 

stated that guarantees are central to 

concerns regarding cross-border swaps, 

and that any guarantee, implicit or 

explicit, by a U.S. parent company to its 

non-U.S. affiliates effectively transfers 

risk to the U.S. parent.251 Therefore, 

Senator Levin stated that the exact form 

of the guarantee should not limit 

compliance with Dodd-Frank 

requirements, and the list of relevant 

guarantee arrangements should be 

expanded to include arrangements 

involving total return swaps, credit 

default swaps or customized options 

that result in the foreign affiliate’s 

activities creating off balance sheet 

liabilities for a U.S. person.252 Eight 

Senators commented that focusing on 

whether affiliates are explicitly 

‘‘guaranteed’’ by a U.S. affiliate does not 

go far enough. They expressed concern 

that market pressures cause U.S. parent 

firms to stand behind their foreign 

affiliates even if explicit guarantees are 

not in place. The Senators suggested 

that other factors be considered to 

determine whether risk is effectively 

guaranteed such as: limitations on 

permissible transactions between the 

parent and affiliate; explicit nonguarantee disclosures to investors, 

regulators and counterparties; 

restrictions on operating under a 

common name or sharing employees 

and officers; and whether 

comprehensive resolution protocols 

exist in the foreign jurisdiction.253

AFR stated that the Commission’s 

failure to clarify its interpretation of 

when affiliates of a ‘‘U.S. person’’ would 

be treated as guaranteed, or to capture 

‘‘the large grey area’’ between explicit 

and informal guarantees, among other 

things, creates opportunities to escape 

Dodd-Frank regulations by shifting 

business overseas.254 AFR stressed that 

the Commission should clarify in the 

guidance that it ‘‘intends to follow 

through on properly implementing these 

principles and will not enable a ‘race to 

the bottom’ in which incentives are 

created for derivatives affiliates of global 

banks . . . to relocate to areas of lax 

regulation to take advantage of an 

inadequate ‘substituted compliance’ 

regime.’’ 255

3. Commission Guidance 

a. Registration Thresholds for U.S. 

Persons and Non-U.S. Persons, 

Including Those Guaranteed by U.S. 

Persons 

Under the Final Entities Rules, a 

person is required to register as a swap 

dealer if its swap dealing activity 

activities over the preceding 12 months 

exceeds the de minimis threshold of 

swap dealing. In addition, Commission 

regulation 1.3(ggg)(4) requires that a 

person include, in determining whether 

its swap dealing activities exceed the de 

minimis threshold, the aggregate 

notional value of swap dealing 

transactions entered by its affiliates 

under common control.256

For purposes of determining whether 

a U.S. person is required to register as 

a swap dealer, a U.S. person should 

count all of its swap dealing activity, 

whether with U.S. or non-U.S. 

counterparties. This interpretation 

reflects that swaps markets are global, 

and therefore, in the Commission’s 

view, all of a U.S. person’s swap dealing 

activities, whether with U.S. persons or 

non-U.S. persons, have the requisite 

jurisdictional nexus and potential to 

impact the U.S. financial system. 

Similarly, the Commission believes that 

all of the swap dealing activities of a 

non-U.S. person that is an affiliate of a 

U.S. person and that is guaranteed by a 

U.S. person (a ‘‘guaranteed affiliate’’),257

or that is an ‘‘affiliate conduit’’ of a U.S. 

person,258 have the requisite statutory 

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offsetting swaps or other arrangements with its U.S. 

affiliate(s) in order to transfer the risks and benefits 

of such swaps with third-parties to its U.S. 

affiliates. The term ‘‘conduit affiliate’’ generally 

would not include swap dealers or affiliates thereof. 

259This Guidance uses the term ‘‘guaranteed or 

conduit affiliate’’ to refer to a non-U.S. person 

whose swap obligations are guaranteed by a U.S. 

person or that is an affiliate conduit. 

260See Final Swap Definition, 77 FR at 48225– 

48226. The Commission explained that when a 

swap counterparty typically uses a guarantee as 

credit support for its swaps obligations, the 

guarantor’s resources are added to the analysis of 

the swap because ‘‘the market will not trade with 

that counterparty at the same price, on the same 

terms, or at all without the guarantee.’’ Id. The 

Commission stated that it viewed a guarantee as, 

generally, ‘‘a collateral promise by a guarantor to 

answer for the debt or obligation of a counterparty 

obligor under a swap.’’ Id. 

261 Id. at 48226 n. 187. In response to a comment 

that guarantees are contingent obligations that do 

not necessarily replicate the economics of the 

underlying swap, the Commission stated: 

The CFTC is persuaded that when a swap (that 

is not a security-based swap or mixed swap) has the 

benefit of a guarantee, the guarantee and related 

guaranteed swap must be analyzed together. The 

events surrounding the failure of [AIGFP] highlight 

how guarantees can cause major risks to flow to the 

guarantor. The CFTC finds that the regulation of 

swaps and the risk exposures associated with them, 

which is an essential concern of the Dodd- Frank 

Act, would be less effective if the CFTC did not 

interpret the term ‘‘swap’’ to include a guarantee of 

a swap. 

Id. at 48226. 

262Congress has recognized the significance of 

guarantees of swaps obligations with respect to the 

activities of financial entities in section 210(c)(16) 

of the Dodd-Frank Act. There, Congress specifically 

addressed guarantees in the context of a Title II 

resolution proceeding. Section 210(c)(16) provides 

that, where a financial institution is in FDIC 

receivership, a ‘‘qualified financial contract’’ (or 

‘‘QFC,’’ which includes swaps) with a subsidiary of 

that financial institution that is guaranteed by the 

financial institution cannot be terminated by a 

counterparty facing that subsidiary pursuant to the 

QFC based solely on the insolvency or receivership 

of the financial institution if certain conditions are 

satisfied. 

263The Commission notes that the SEC CrossBorder Proposal agrees that ‘‘[i]n a security-based 

swap transaction between two non-U.S. persons 

where the performance of at least one side of the 

transaction is guaranteed by a U.S. person, . . . the 

guarantee creates risk to the U.S. financial system 

and counterparties (including U.S. guarantors) to 

the same degree as if the transaction were entered 

into directly by a U.S. person.’’ SEC Cross-Border 

Proposal, 78 FR at 30986. However, the SEC does 

not propose to address the risk posed by the 

guarantee through requiring the non-U.S. 

guaranteed affiliate to register as a security-based 

swap dealer, but rather through the application of 

principles of attribution in the major security-based 

swap participant definition. See id. at 31006. 

Continued 

nexus and potential to impact the U.S. 

financial system. Therefore, under the 

Commission’s interpretation of 2(i), a 

guaranteed or conduit affiliate 259

should count swap dealing transactions 

towards the de minimis threshold for 

swap dealer registration in the same 

manner as a U.S. person. That is, in 

light of the global nature of the swaps 

markets, a guaranteed or conduit 

affiliate should count all of its swap 

dealing transactions, whether with U.S. 

or non-U.S. counterparties, towards the 

de minimis threshold for swap dealer 

registration. 

However, under the Commission’s 

interpretation of section 2(i), a more 

circumscribed registration policy 

applies to non-U.S. persons that are not 

guaranteed or conduit affiliates. In this 

case, the Commission believes that the 

non-U.S. person should count only its 

swap dealing transactions with U.S. 

persons (other than foreign branches of 

swap dealers that are registered with the 

Commission), and with guaranteed 

affiliates towards the de minimis 

thresholds for swap dealer registration, 

with three exceptions, which are 

described below. Non-U.S. persons that 

are not guaranteed or conduit affiliates 

are not required to count swaps with a 

conduit affiliate towards the swap 

dealer de minimis calculation. 

Similarly, for purposes of determining 

whether a U.S. person is required to 

register as an MSP, as the Commission 

interprets section 2(i), a U.S. person and 

a guaranteed or conduit affiliate should 

include all of swap positions with 

counterparties, whether they are U.S. or 

non-U.S. persons. With respect to 

whether a non-U.S. person must 

calculate whether its swap positions 

create exposures above the relevant 

MSP thresholds, the Commission 

believes, for policy reasons and 

consistent with principles of 

international comity, that CEA section 

2(i) should not be interpreted to require 

non-U.S. persons that are not financial 

entities to include for MSP calculation 

purposes certain swap positions as 

explained below. 

As the Commission explained in the 

Proposed Guidance, in the event of a 

default or insolvency of a non-U.S. swap 

dealer with more than a de minimis 

level of swap dealing with U.S. persons, 

or a non-U.S. MSP with more than the 

threshold level of swaps positions with 

U.S. persons, the swap dealer’s or MSP’s 

U.S. counterparties could be adversely 

affected. Such an event may adversely 

affect numerous persons engaged in 

commerce within the United States, 

disrupt such commerce, and increase 

the risk of a widespread disruption to 

the financial system in the United 

States. 

Similar effects on U.S. persons and on 

the U.S. financial system may occur in 

the event of a default or insolvency of 

certain non-U.S. person with respect to 

swap dealing transactions in excess of 

the de minimis level, or swaps positions 

above the MSP threshold, entered into 

such non-U.S. persons with other nonU.S. persons whose swaps obligations 

are guaranteed by a U.S. person. The 

Commission interprets section 2(i) of 

the CEA to encompass swaps entered 

into by guaranteed or conduit affiliates 

in addition to encompassing swaps 

entered into by U.S. persons. In the final 

rule to further define the term ‘‘swap,’’ 

the Commission found that a guarantee 

of a swap is a term of that swap that 

affects the price or pricing attributes of 

that swap, and that when a swap has the 

benefit of a guarantee, the guarantee is 

an integral part of that swap.260 The 

Commission therefore interprets the 

term ‘‘swap’’ (that is not a securitybased swap or mixed swap) ‘‘to include 

a guarantee of such swap, to the extent 

that a counterparty to a swaps position 

would have recourse to the guarantor in 

connection with the position.’’ 261

Because a guarantee of a swap is an 

integral part of the swap, and 

counterparties may not otherwise be 

willing to enter into a swap with the 

guaranteed affiliate, the affiliate would 

not have significant swap business if not 

for the guarantee. The Commission 

believes that swap activities outside the 

United States that are guaranteed by 

U.S. persons would generally have a 

direct and significant connection with 

activities in, or effect on, U.S. commerce 

in a similar manner as the underlying 

swap would generally have a direct and 

significant connection with activities in, 

or effect on, U.S. commerce if the 

guaranteed counterparty to the 

underlying swap were a U.S. person.262

Similarly, the Commission believes that 

swap activities outside the United States 

of an affiliate conduit would generally 

have a direct and significant connection 

with activities in, or effect on, U.S. 

commerce in a similar manner as would 

be the case if the affiliate conduit’s U.S. 

affiliates entered into the swaps 

directly. 

Accordingly, under section 2(i), the 

Commission intends to interpret section 

2(i) as applying the swaps provisions of 

the CEA to swaps that are entered into 

by guaranteed or conduit affiliates in a 

manner similar to how section 2(i) 

would apply if a U.S. person had 

entered into the swap (subject to 

appropriate considerations of 

international comity for non-guaranteed, 

non-U.S. persons facing such 

guaranteed or conduit affiliates, as 

discussed below). 

Thus, in the case of a guaranteed or 

conduit affiliate, the Commission 

interprets CEA section 2(i) to provide 

that the guaranteed or conduit affiliate 

is expected to count toward the swap 

dealer de minimis threshold all of its 

swap dealing activities.263 Following a 

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The Commission believes that while the SEC’s 

proposed approach may be appropriate for the 

securities-based swaps market, it would not be 

desirable to follow a similar approach for the swaps 

markets within the Commission’s jurisdiction. Due 

to the differing characteristics of the markets, such 

as the involvement of a much larger and more 

diverse number of commercial companies using 

swaps as compared to security-based swaps, the 

risks that may be transmitted through the 

interconnected financial system from the non-U.S. 

guaranteed affiliate operating as a swap dealer to 

the U.S. swaps market may not be adequately 

managed by the MSP structure, which has relatively 

high exposure thresholds before registration is 

required. 

264Final Swap Definition, 77 FR at 48226. 

265According to one commenter, these concerns 

may be present even where a guarantee is implicit, 

but not explicitly provided: 

A recent example of the importance of implicit 

guarantees is the collapse of Bear Stearns, which 

was brought down by the failure of non-guaranteed 

hedge fund affiliates. These hedge funds were 

foreign affiliates technically not guaranteed by the 

parent, and the investment by the parent company 

in the funds was minimal. However, the firm was 

forced to try to save the funds for reputational 

reasons and also because a fire sale of subsidiary 

assets could have seriously impacted correlated 

positions held by the parent company. . . . The 

example of Bear Stearns is only one among many 

instances where parent companies have been forced 

to rescue failing affiliates even in the absence of an 

explicit guarantee. 

AFR (Aug. 27, 2012) at 8. See also Letter from 

Sen. Levin, note 216, supra. 

266See Proposed Guidance, 77 FR at 41221 n. 47. 

267Thus, for example, while keepwells and 

liquidity puts, certain types of indemnity 

agreements, master trust agreements, liability or 

loss transfer or sharing agreements, and any other 

explicit financial support arrangements may 

provide for different third-party rights and/or 

address different risks than traditional guarantees, 

the Commission does not believe that these 

differences would generally be relevant for 

purposes of section 2(i). Under these agreements or 

arrangements, one party commits to provide a 

financial backstop or funding against potential 

losses that may be incurred by the other party, 

either from specific contracts or more generally. In 

the Commission’s view, this is the essence of a 

guarantee. 

268For purposes of this Guidance regarding the 

application of Commission regulation 1.3(ggg)(4), 

the Commission construes the phrase ‘‘affiliates 

under common control’’ with respect to affiliates as 

stated in the Final Entities Rules, which defines 

control as ‘‘the possession, direct or indirect, of the 

power to direct or cause the direction of the 

management and policies of a person, whether 

through the ownership of voting securities, by 

contract or otherwise.’’ See Final Entities Rules, 77 

FR at 30631 n. 437. Thus, for purposes of this 

Guidance, a reference to ‘‘affiliates under common 

control’’ with a person includes affiliates that are 

controlling, controlled by, or under common 

control with such person. 

269See, e.g., Cleary (Aug. 16, 2012) at 9–10; IIB 

(Aug. 27, 2012) at 22–24; FOA (Aug. 13, 2012) at 

11–12; ISDA (Aug. 10, 2012) at 11–12; SocGen 

(Aug. 8, 2012) at 8; Deutsche Bank (Aug. 27, 2012) 

at 4–5, FSR (Aug. 27, 2012) at 4–6. 

270Cleary (Aug. 16, 2012) at 9–10; IIB (Aug. 27, 

2012) at 22. 

271 IIB (Aug. 9, 2012) at 6. 

272Cleary (Aug. 16, 2012) at 9–10. 

similar rationale, the Commission 

interprets CEA section 2(i) to provide 

that a guaranteed or conduit affiliate, in 

calculating whether the applicable MSP 

threshold is met, would be expected to 

include, and attribute to the U.S. 

guarantor, the notional value of: (1) All 

swaps with U.S. and non-U.S. 

counterparties, and (2) any swaps 

between another non-U.S. person and a 

U.S. person or guaranteed affiliate, if the 

potential non-U.S. MSP guarantees the 

obligations of the other non-U.S. person 

thereunder. 

In the Final Swap Definition, the 

Commission also acknowledged that a 

‘‘full recourse’’ guarantee would have a 

greater effect on the price of a swap than 

a ‘‘limited’’ or ‘‘partial recourse’’ 

guarantee, yet nevertheless determined 

that the presence of any guarantee with 

recourse, no matter how robust, is price 

forming and an integral part of a 

guaranteed swap.264 Moreover, as the 

recent financial crisis has demonstrated, 

in a moment of crisis—whether at the 

firm-level or more generally, marketwide—it matters little whether the 

parent guarantees are capped or 

otherwise qualified. In the face of 

solvency concerns, the parent guarantor 

will find it necessary to assume the 

liabilities of its affiliates.265 For these 

reasons, the Commission declines to 

incorporate in the Guidance 

commenters’ suggestions that only 

certain types of guarantees (e.g., under 

which there is a material likelihood of 

liability) should be considered for 

purposes of registration determinations 

for non-U.S. persons. 

Finally, with respect to the Japanese 

Bankers Association’s concern about 

potential constraints on their hedging 

activities, the Commission contemplates 

that swaps that are between foreign 

branches of U.S. swap dealers and 

dealing non-U.S. persons generally will 

be excluded from the swap dealer 

registration determination, as further 

described below. The Commission 

believes that under section 2(i) of the 

CEA, it would generally be appropriate 

for non-U.S. market participants, such 

as members of the Japanese Bankers 

Association, to engage in hedging 

activities with foreign branches of U.S. 

swap dealers without being expected to 

count such transactions for purposes of 

the swap dealer registration 

determination. 

The Commission also is affirming 

that, for purposes of this Guidance, the 

Commission would interpret the term 

‘‘guarantee’’ generally to include not 

only traditional guarantees of payment 

or performance of the related swaps, but 

also other formal arrangements that, in 

view of all the facts and circumstances, 

support the non-U.S. person’s ability to 

pay or perform its swap obligations with 

respect to its swaps.266 The Commission 

believes that it is necessary to interpret 

the term ‘‘guarantee’’ to include the 

different financial arrangements and 

structures that transfer risk directly back 

to the United States. In this regard, it is 

the substance, rather than the form, of 

the arrangement that determines 

whether the arrangement should be 

considered a guarantee for purposes of 

the application of section 2(i).267

b. Aggregation 

Commission regulation 1.3(ggg)(4) 

requires that a person include, in 

determining whether its swap dealing 

activities exceed the de minimis 

threshold, the aggregate notional value 

of swap dealing transactions entered by 

its affiliates under common control.268

Additionally, under the Proposed 

Guidance, a non-U.S. person, in 

determining whether its swap dealing 

transactions exceed the de minimis 

threshold, would include the aggregate 

notional value of swap dealing 

transactions entered into by its non-U.S. 

affiliates under common control but 

would not include the aggregate 

notional value of swap dealing 

transactions entered into by its U.S. 

affiliates. 

Numerous commenters objected to the 

aggregation interpretation regarding 

swap dealer registration in the Proposed 

Guidance.269 IIB and Cleary, while 

acknowledging the Commission’s 

evasion concerns, contended that the 

aggregation interpretation in the 

Proposed Guidance would effectively 

eliminate the de minimis exemption for 

any affiliate of a registered swap 

dealer.270 IIB further stated that the 

proposed aggregation interpretation 

would require a significant amount of 

coordination among entities within a 

corporate group in order to gather the 

relevant information and to reconfigure 

their registration plans. These 

difficulties, according to IIB, would be 

compounded by uncertainties in the 

proposed interpretation of the term 

‘‘U.S. person.’’ 271

Cleary argued that the positions of a 

registered swap dealer should be 

excluded from the de minimis 

calculation by its affiliate and further 

added that such aggregation relief 

should be available to any U.S. or nonU.S. affiliates of any U.S.- or non-U.S. 

registered swap dealer.272 FOA 

recommended that the Commission 

consider a policy that would permit 

non-U.S. persons to not aggregate the 

swap dealing activities of their non-U.S. 

swap dealing affiliates under common 

control and to require aggregation only 

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273FOA (Aug. 13, 2012) at 11–12. FOA argued 

that the Proposed Guidance would have a 

disproportionate effect by providing that a non-U.S. 

person engaging in a de minimis amount of U.S.- 

facing swap dealing activities should register as a 

swap dealer simply because its other non-U.S. 

affiliates under common control, in the aggregate, 

exceed the de minimis threshold, even though there 

is no coordinated effort. Id. 

274 ISDA (Aug. 10, 2012) at 12 (noting that if an 

exclusion from aggregation for an affiliated swap 

dealer’s swaps were in place, then the group in the 

above example could decide which entity registers 

and thereby bring the swaps attributable to the 

other entity under the threshold). 275Also, under this alternative approach, a nonU.S. person would not be expected to include the 

aggregate notional value of swap dealing 

transactions of any of its non-U.S. affiliates under 

common control where the counterparty to such 

affiliate is also a non-U.S. person. 

276 Greenberger/AFR (Feb. 6, 2013) at 8–9. 

277Better Markets (Feb. 15, 2013) at 8–9. 

278SIFMA/CH/FSR (Feb. 6, 2013) at A2–3 

279 ISDA (Feb. 6, 2013) at 3–4 (relevant affiliates 

are unlikely to have systems to monitor U.S. person 

status of swap counterparties). See also European 

Federation of Energy Traders (‘‘EFET’’) (Feb. 6, 

2013) at 3–4 (arguing that cost of system to monitor 

aggregation would be substantial and relative 

benefits of requiring aggregation are small, given 

that equivalent regulation already applies, or soon 

will apply, in non-U.S. jurisdictions). ISDA, IIB and 

CEWG all stated that the treatment in the January 

Order of grandfathered affiliates (i.e., those affiliates 

engaged in swap dealing with U.S. persons on 

December 21, 2012) should be made permanent in 

order to avoid disrupting established transactional 

relationships. See ISDA (Feb. 6, 2013) at 3; IIB (Feb. 

6, 2013) at 6; CEWG (Feb. 25, 2013) at 2–4. 

280Mitsubishi UFJ (Feb. 1, 2013) at 3–4. 

281 Id. at 5. 

where there is evidence that a group of 

non-U.S. swap dealing affiliates 

sufficiently coordinate their swap 

dealing activities.273 ISDA asserted that 

the proposed asymmetric application of 

aggregation (i.e., U.S. affiliates aggregate 

the entire worldwide group, but nonU.S. affiliates aggregate only non-U.S. 

affiliates) would produce arbitrary 

results, citing, as an example, a group 

that has a U.S. affiliate with $500 

million of swaps and a non-U.S. affiliate 

with $7.6 billion of swaps with non-U.S. 

persons. In that scenario, the U.S. 

affiliate must register; the non-U.S. 

affiliate is not required to register.274

In the Further Proposed Guidance, the 

Commission proposed an alternative 

interpretation of the aggregation 

requirement in Commission regulation 

1.3(ggg)(4). Under this alternative, a 

non-U.S. person would be expected, in 

the consideration of whether its swap 

dealing transactions exceed the de 

minimis threshold, to include the 

aggregate notional value of swap dealing 

transactions entered into by all its 

affiliates under common control (i.e., 

both non-U.S. affiliates and U.S. 

affiliates), but not include the aggregate 

notional value of swap dealing 

transactions of any non-U.S. affiliate 

under common control that is registered 

as a swap dealer.275 The Commission 

noted that the application of the 

aggregation requirement in Commission 

regulation 1.3(ggg)(4) to non-U.S. 

affiliates of non-U.S. swap dealers may, 

in certain circumstances, impose 

significant burdens on such non-U.S. 

affiliates without advancing significant 

regulatory interests of the Commission. 

Because the conduct of swap dealing 

business through locally-organized 

affiliates may in some cases be required 

in order to comply with legal 

requirements or business practices in 

foreign jurisdictions, such non-U.S. 

affiliates may be numerous and it could 

be impractical to require all such nonU.S. affiliates to register as swap 

dealers. Further, the Commission’s 

interest in registration may be reduced 

for a non-U.S. affiliate of a registered 

non-U.S. swap dealer where the nonU.S. affiliate (or group of such affiliates) 

engages in only a small amount of swap 

dealing activity with U.S. persons. 

On the other hand, the Commission 

also noted in the Further Proposed 

Guidance that, given the borderless 

nature of swap dealing activities, a swap 

dealer may conduct swap dealing 

activities through various affiliates in 

different jurisdictions, which suggests 

that its interpretation should take into 

account the applicable swap dealing 

transactions entered by all of a non-U.S. 

person’s affiliates under common 

control worldwide. Otherwise, affiliated 

persons may not register solely because 

their swap dealing activities are 

divided, such that each affiliate falls 

below the de minimis level. The 

Commission noted its concern that a 

policy under which such affiliates 

whose swap dealing activities 

individually fall below the de minimis 

level, but whose swap dealing activities 

in the aggregate exceed the de minimis 

level, would not register as swap dealers 

could provide an incentive for firms to 

spread their swap dealing activities 

among several unregistered affiliates 

rather than centralize their swap dealing 

in registered firms. Such a result would 

increase systemic risks to U.S. market 

participants and impede the 

Commission’s ability to protect U.S. 

markets. 

Two commenters supported the 

alternative interpretation of the 

aggregation requirement set out in the 

Further Proposed Guidance. 

Greenberger/AFR stated that the 

aggregation requirement helps to 

prevent the spreading of risk, because 

without aggregation U.S. persons could 

avoid registration as swap dealers by 

routing their swap activity through nonU.S. affiliates and thereby remain under 

the de minimis threshold.276 Better 

Markets supported the alternative 

interpretation in the Further Proposed 

Guidance because it contemplates that 

non-U.S. persons would aggregate all 

swap dealing of all affiliates, including 

U.S. affiliates, except where the affiliate 

is registered as a swap dealer.277

Other commenters were opposed to 

the alternative interpretation in the 

Further Proposed Guidance. SIFMA/ 

CH/FSR stated that aggregation of swap 

dealing activity across affiliates is not 

appropriate in any circumstance.278

ISDA stated that application of the 

aggregation principle to non-U.S. 

affiliates may impose significant 

burdens on the non-U.S. affiliates 

without advancing significant regulatory 

interests, and expanding the scope of 

aggregation to include swaps of U.S. 

affiliates would exacerbate this 

disproportionality.279

Mitsubishi UFJ Financial Group Inc. 

(‘‘Mitsubishi UFJ’’) asked the 

Commission to clarify its interpretation 

of the term ‘‘control’’ in the context of 

a non-U.S. joint venture where only one 

owner controls and operates, and 

financially consolidates, the joint 

venture entity.280 Mitsubishi UFJ stated 

that in this case the joint venture should 

be linked for aggregation purposes to the 

owner that has operational control, 

provided that the owner has at least one 

affiliate that is a registered swap 

dealer.281

In the Further Proposed Guidance, the 

Commission asked commenters to 

address several questions regarding the 

aggregation provision. In particular, the 

Commission asked whether the 

alternative interpretation of the 

aggregation requirement should apply to 

non-U.S. persons that are guaranteed by 

a U.S. person with respect to their 

swaps obligations in the same way that 

it applies to non-U.S. persons that are 

not so guaranteed, and if so, should the 

Commission continue to construe the 

term ‘‘guarantee’’ for this purpose to 

mean any collateral promise by a 

guarantor to answer for the debt or 

obligation of an obligor under a swap 

and should the term include 

arrangements such as keepwells and 

liquidity puts. 

Greenberger/AFR replied to this 

question affirmatively, stating that the 

Commission should establish a 

rebuttable presumption that foreign 

affiliates are guaranteed by the parent 

company, and require clear evidence 

that the market has been explicitly 

informed that the parent will not stand 

behind affiliate liabilities in the event of 

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282 Greenberger/AFR (Feb. 6, 2013) at 5–6. 

283 Id. at 6. 

284SIFMA/CH/FSR (Feb. 6, 2013) at A4. 

285 Id. 

286 ISDA (Feb. 6, 2013) at 2–3. 

287 Id. at 3. 

288 Japan FSA (Feb. 6, 2013) at 2. 

289 Greenberger/AFR (Feb. 6, 2013) at 9. 

290 Id. 

291 Id. 

292CEWG (Feb. 25, 2013) at 2–4. 

293 ISDA (Feb. 6, 2013) at 4; SIFMA/CH/FSR (Feb. 

6, 2013) at B11–12. CEWG and ISDA also both 

stated that U.S. persons should in no event be 

required to aggregate swaps of non-U.S. affiliates 

with non-U.S. persons, because such swaps have 

insufficient nexus to the United States. CEWG (Feb. 

25, 2013) at 2; ISDA (Feb. 6, 2013) at 4. 

294Mizuho/Sumitomo (Feb. 6, 2013) at 3. 

295 Id. See also Japan FSA (Feb. 6, 2013) at 2 

(arguing that the swap dealing activity of U.S. 

affiliates that are registered as swap dealers should 

be excluded because the affiliates are subject to 

supervision by the Commission). 

296 IIB (Feb. 6, 2013) at 5–6. 

297 Japanese Bankers Association (Feb. 6, 2013) at 

2–3. See also Japan FSA (Feb. 6, 2013) at 2 (arguing 

that all affiliates of Japanese financial institutions 

should be excluded from the de minimis 

calculation because the affiliates are supervised by 

Japan FSA on a consolidated basis). 

298EDF Trading (Feb. 6, 2013) at 1–4. See also 

Brigard & Urrutia Abogados (Feb. 6, 2013) at 2 (nonU.S. persons should be allowed to exclude from the 

de minimis calculation the swap dealing activities 

of U.S. affiliates, and of any affiliate (U.S. or nonU.S.) that is a registered swap dealer). 

a default or bankruptcy.282 To do 

otherwise, they stated, would encourage 

swap activity through non-U.S. affiliates 

rather than U.S. persons.283

Other commenters stated that the 

alternative interpretation should not 

apply to non-U.S. persons that are 

guaranteed by a U.S. person in the same 

way that it applies to non-U.S. persons 

that are not so guaranteed. SIFMA/CH/ 

FSR stated that a guarantee by a U.S. 

person is not, in itself, a sufficient nexus 

for jurisdiction under section 2(i) of the 

CEA, since swaps may be guaranteed for 

a number of reasons that do not 

necessarily implicate U.S. 

jurisdiction.284 Thus, there may be no 

importation of risk to the United States 

through the guarantee and, in any event, 

concern about importation of risk is 

appropriately addressed where the 

guarantor is a prudentially regulated 

entity, and the Commission should rely 

on its anti-evasion authority to prevent 

use of guarantees to evade registration 

requirements.285 ISDA also stated that a 

guarantee constitutes an insufficient 

jurisdictional nexus, and that it would 

be consistent with international comity 

and regulatory reciprocity to regulate 

swaps between two non-U.S. persons 

primarily under non-U.S. regulation.286

Regarding the potential for risk transfer 

across borders, ISDA stated that much of 

the regulation applicable to swap 

dealers is not relevant to this concern— 

external and internal business conduct 

rules, for example, cannot assure the 

ultimate solvency of a swap dealer, and 

it is unclear that encouraging further 

capitalization of overseas affiliates of a 

U.S. guarantor, causing financial 

resources to be contributed overseas, 

would advance the stability of the U.S. 

financial system.287 The Financial 

Services Agency, Government of Japan 

(‘‘Japan FSA’’) also thought that a 

guarantee from a U.S. person should 

not, in itself, cause swaps with a nonU.S. person to be included in the de 

minimis calculation.288

The Commission also asked if nonU.S. persons should not be expected to 

include in the de minimis calculation 

the swap dealing transactions of their 

U.S. affiliates under common control, 

or, alternatively, should the policy of 

the Commission contemplate that they 

would exclude from the de minimis 

calculation the swap dealing 

transactions of their U.S. affiliates under 

common control that are registered as 

swap dealers. 

Responding to this question, 

Greenberger/AFR stated it is important 

in any case to require aggregation across 

all non-U.S. affiliates of a global bank, 

in order to effectively capture 

transactions spread across multiple 

foreign affiliates; otherwise, it would be 

much easier to avoid registration as a 

swap dealer.289 They believe that the 

second alternative—excluding only the 

swap dealing transactions of U.S. 

affiliates that are registered as swap 

dealers—is much preferable to the first, 

because the first alternative would 

permit two groups of affiliates, one 

within the U.S. and another non-U.S., to 

both engage in swap dealing up to the 

de minimis level, which would create 

an incentive to split a swap dealing 

business between U.S. and non-U.S. 

affiliates.290 The second alternative 

would effectively allow a group of 

affiliates that individually and 

collectively fall below the de minimis 

threshold to forego registration, which 

they believed could be a sensible 

compromise, so long as aggregation 

across foreign affiliates is maintained.291

Several commenters were opposed to 

a policy under which non-U.S. persons 

would aggregate the swap dealing 

activities of U.S. affiliates that are 

registered swap dealers. CEWG argued 

that this policy could lead to 

registration of non-U.S. persons as swap 

dealers because of the activities of their 

U.S. affiliates, which it asserted would 

be contrary to the separation sometimes 

maintained between U.S. and non-U.S. 

affiliates and unsupported by any policy 

rationale.292 ISDA and SIFMA/CH/FSR 

were of the view that all persons (both 

U.S. and non-U.S.) should be able to 

exclude from their de minimis 

calculations the swaps of any affiliate 

(whether U.S. or non-U.S.) that is 

registered with the Commission as a 

swap dealer, because swaps by a 

registered swap dealer are subject to 

Dodd-Frank protections and no purpose 

would be served by attributing them to 

affiliated entities in order to impose 

swap dealer registration on those 

affiliates.293

The Mizuho Corporate Bank, Ltd. 

(‘‘Mizuho’’) and Sumitomo submitted a 

joint letter arguing that the swap dealing 

activity of U.S. affiliates that are 

registered as swap dealers should be 

excluded from aggregation because 

otherwise the de minimis exception 

would be effectively unavailable to nonU.S. based firms that conduct U.S.- 

facing swap dealing activity through a 

U.S. affiliate that is registered as a swap 

dealer.294 This result, in turn, would 

inappropriately disfavor these firms as 

compared to firms that conduct the 

same business through non-U.S. 

affiliates registered as swap dealers; the 

Commission’s interpretation should 

encourage, rather than disfavor, 

registration of U.S. affiliates as swap 

dealers.295 IIB stated that the policy 

reasons for allowing the exclusion of 

swap dealing by non-U.S. affiliates 

registered as swap dealers also applies 

to the dealing activity of U.S affiliates 

that are registered.296

Other commenters went further, 

stating that non-U.S. persons should not 

be required to aggregate the swap 

dealing activities of any of their U.S. 

affiliates. The Japanese Bankers 

Association stated U.S. affiliates should 

be excluded from the non-U.S. person’s 

calculations because the U.S. persons 

are already subject to Dodd-Frank 

regulation as warranted by their 

activities.297 EDF Trading stated that 

non-U.S. persons that maintain minimal 

contacts with the United States should 

not be required to register as swap 

dealers due to the activities of their U.S. 

affiliates, because such a requirement 

would be inconsistent with the 

jurisdictional limitation in section 2(i) 

of the CEA; result in duplicative and 

potentially inconsistent regulatory 

requirements of multiple jurisdictions 

applying to the same swap activity; and 

encourage commercial firms to cease 

potential swap dealing activity in the 

U.S., resulting in reduced U.S. swaps 

market liquidity and fragmentation of 

the global swaps markets.298

Last, the Commission solicited 

commenters’ views on whether a person 

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299 Greenberger/AFR (Feb. 6, 2013) at 8–9. 

300See id. (citing press reports that U.S. banks 

such as Morgan Stanley and Goldman Sachs are 

using foreign entities ‘‘in seriatim fashion to avoid 

going over the $ 8 billion test’’). Making a similar 

point, Better Markets emphasized that market 

participants may be expected to implement the 

lowest-cost structure, considering all regulatory 

costs. Better Markets (Feb. 6, 2013) at 15. 

301 Japanese Bankers Association (Feb. 6, 2013) 

at 3. 

302 Id. 

303 Id. at 3–4. 

304EDF Trading (Feb. 6, 2013) at 5. 

305SIFMA/CH/FSR (Feb. 6, 2013) at A3. 

306 IIB (Feb. 6, 2013) at 3. 

307 Id. 

308For purposes of this Guidance, the 

Commission clarifies that a reference to ‘‘affiliates 

under common control’’ with a person includes 

affiliates that are controlling, controlled by, or 

under common control with such person. See note 

268, supra. Further, in response to a question from 

a commenter, the Commission clarifies that for this 

purpose, the term ‘‘affiliates under common 

control’’ includes parent companies and 

subsidiaries, and is not limited to ‘‘sister 

companies’’ at the same organizational level. See 

David Mu (Jan. 8, 2013). 

engaged in swap dealing activities could 

take advantage of an interpretation of 

the aggregation provision that allows a 

person to exclude the swap dealing 

activities of one or more of its affiliates 

under common control. The 

Commission asked whether, under such 

an interpretation, a person could spread 

its swap dealing activities into multiple 

affiliates, each under the de minimis 

threshold, and therefore avoid the 

registration requirement, even though 

the aggregate level of swap dealing by 

the affiliates exceeds the de minimis 

threshold. In this regard, the 

Commission asked if any such 

interpretation should include any 

conditions or limits on the overall 

amount of swap dealing engaged in by 

unregistered persons within an affiliated 

group. 

Greenberger/AFR opined that any 

approach that did not require significant 

aggregation of swap dealing activities 

across affiliates would create the danger 

of risk spreading outlined in the Further 

Proposed Guidance.299 They stated that 

financial institutions could easily 

remain under the de minimis threshold 

and thereby avoid registration by 

routing swaps through their non-U.S. 

affiliates.300

The Japanese Bankers Association 

stated that while the approach in the 

Further Proposed Guidance could 

potentially prevent evasion, it would do 

so at the cost of requiring multiple nonU.S. affiliates to register as swap dealers 

even if the group of affiliates 

concentrated its U.S. swap dealing 

activity in one U.S. entity.301 In fact, 

they argued, concentrating U.S. swap 

dealing activity in a U.S. entity should 

be encouraged because it facilitates 

Commission supervision of that 

activity.302 Further, they stated that to 

expect non-U.S. persons to register as 

swap dealers as a result of dealing 

activity by their U.S. affiliates 

undermines the regulatory 

independence of different jurisdictions 

and international understandings on 

regulatory harmonization.303 Similarly, 

EDF Trading stated that expecting 

multiple entities within a corporate 

group to register as swap dealers would 

be burdensome and may not advance 

regulatory interests, and the alternative 

in the Further Proposed Guidance 

would merely increase economic and 

regulatory burdens without achieving a 

significant reduction in systemic risk, 

because it would encourage the 

concentration of swap dealing activity 

in non-U.S affiliates.304

SIFMA/CH/FSR were of the view that 

it would be burdensome for market 

participants to use multiple affiliates to 

avoid swap dealer registration, because 

moving swap dealing activity between 

affiliates requires a significant legal, 

technological and operational 

investment, and fragmenting the activity 

among affiliates may make it harder for 

a multinational institutions to manage 

risk efficiently.305 Along the same lines, 

IIB stated that where one entity in a 

corporate group is registered as a swap 

dealer, there are substantial commercial 

and credit risk incentives to centralize 

swap dealing in the registered entity, 

because doing so maximizes the 

potential to net offsetting transactions, 

uses capital more efficiently, and is 

operationally efficient.306 On the other 

hand, IIB stated that using unregistered 

entities for swap dealing would not 

reduce the fixed costs incurred in 

registration and that the unregistered 

entities in the group would still be 

subject to swap costs such as clearing, 

reporting and trade execution.307

Based on the comments received on 

the Proposed Guidance and the Further 

Proposed Guidance, and its further 

review of issues related to the 

aggregation requirement, the 

Commission’s policy is to interpret the 

aggregation requirement in Commission 

regulation 1.3(ggg)(4) in a manner that 

applies the same aggregation principles 

to all affiliates in a corporate group, 

whether they are U.S. or non-U.S. 

persons. Further, the Commission will 

generally apply the aggregation 

principle (as articulated in the Final 

Entities Rules) such that, in considering 

whether a person is engaged in more 

than a de minimis level of swap dealing, 

a person (whether U.S. or non-U.S.) 

should generally include all relevant 

dealing swaps of all its U.S. and nonU.S. affiliates under common control,308

except that swaps of an affiliate (either 

U.S. or non-U.S.) that is a registered 

swap dealer are excluded, as discussed 

below. The Commission notes that this 

policy would ensure that the aggregate 

notional value of applicable swap 

dealing transactions of all such 

unregistered U.S. and non-U.S. affiliates 

does not exceed the de minimis level. 

Stated in general terms, the 

Commission’s interpretation allows both 

U.S. persons and non-U.S. persons in an 

affiliated group to engage in swap 

dealing activity up to the de minimis 

threshold. When the affiliated group 

meets the de minimis threshold in the 

aggregate, one or more affiliate(s) (inside 

or outside the United States) would 

generally have to register as swap 

dealer(s) so that the relevant swap 

dealing activity of the unregistered 

affiliates remains below the threshold. 

The Commission recognizes the 

borderless nature of swap dealing 

activities, in which a dealer may 

conduct swap dealing business through 

its various affiliates in different 

jurisdictions, and the Commission 

believes that its policy on aggregation 

outlined above addresses the concern 

that an affiliated group of U.S. and nonU.S. persons with significant swap 

dealing transactions with U.S. persons 

or guaranteed affiliates may not be 

required to register solely because such 

swap dealing activities are divided 

between affiliates that each fall below 

the de minimis level. 

c. Exclusion of Certain Swaps by NonU.S. Persons From the Swap Dealer De 

Minimis Threshold 

The Proposed Guidance would 

generally allow a non-U.S. person to 

exclude from its de minimis threshold 

calculation its swaps with foreign 

branches of U.S. swap dealers. This 

exclusion was intended to allow nonU.S. persons to continue their interdealer swap activities with foreign 

branches of U.S. swap dealers without 

exceeding the de minimis threshold, 

thereby triggering a requirement to 

register as a swap dealer. 

Commenters on the Proposed 

Guidance, such as Goldman Sachs, 

argued that the rationale for this 

exclusion is equally applicable when 

non-U.S. persons that are banks or 

broker-dealers engage in swap dealing 

transactions with U.S. swap dealers that 

do not conduct overseas business 

through foreign branches. Absent a 

similar interpretation in these 

circumstances, the commenters argued, 

U.S. swap dealers would be at a 

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45324 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

309 Goldman (Aug. 27, 2012) at 5–6. 

310Note that if a non-U.S. person that is not a 

guaranteed or conduit affiliate of a U.S. person 

engages in a swap dealing transaction with another 

non-U.S. person that is not a guaranteed affiliate of 

a U.S. person (including such non-U.S. person that 

is a swap dealer), then such swap dealing 

transaction does not count toward the de minimis 

threshold of the unregistered, swap dealing party. 

311The types of offices the Commission would 

generally consider in this regard to be a ‘‘foreign 

branch’’ of a U.S. bank, and the circumstances in 

which a swap would generally be treated as being 

with such foreign branch, are discussed further in 

section C, infra. 

312See Goldman (Aug. 27, 2012) at 3–4. 

313 In the Proposed Guidance, the Commission 

asked whether the place of execution or clearing is 

relevant to the determination of whether a non-U.S. 

person should be required to register as a swap 

dealer. The Commission’s policy is that a person 

generally would not be required to register as a 

swap dealer if the person’s only connection to the 

United States is that the person uses a U.S.- 

registered swap execution facility (‘‘SEF’’)or 

designated contract market (‘‘DCM’’) in connection 

with its swap dealing activities. 

314See CEA section 2(h)(7)(C) for a definition of 

financial entity. 

315See SIFMA (Aug. 27, 2012) at A28–29; Citi 

(Aug. 27, 2012) at 2–3. 

316The interpretation applies to non-U.S. persons 

that are not guaranteed by U.S. persons. Non-U.S. 

financial entities would be required to include 

swaps positions with foreign branches and 

guaranteed affiliates of U.S. persons unless they 

choose to comply with voluntary margining 

requirements, discussed below. 

competitive disadvantage vis-a`-vis 

foreign branches of U.S. swap dealers 

since non-U.S. persons would be 

incentivized to limit their dealing 

activities to foreign branches of U.S. 

swap dealers.309

The Commission’s policy is to 

generally allow non-U.S. persons that 

are not guaranteed or conduit affiliates 

of U.S. persons not to count toward 

their de minimis thresholds their swap 

dealing transactions with (i) A foreign 

branch of a U.S. swap dealer, (ii) a 

guaranteed affiliate of a U.S. person that 

is a swap dealer, and (iii) a guaranteed 

or conduit affiliate that is not a swap 

dealer and itself engages in de minimis 

swap dealing activity and which is 

affiliated with a swap dealer.310 The 

Commission believes that where the 

guaranteed affiliate of a U.S. person is 

registered as a swap dealer, or where the 

foreign branch is included within the 

swap dealer registration of its U.S. home 

office, then it is appropriate to generally 

permit such non-U.S. not to count its 

swap dealing transactions with those 

entities against the non-U.S. person’s de 

minimis threshold, because in these 

cases one counterparty to the swap is a 

swap dealer subject to comprehensive 

swap regulation and operating under the 

oversight of the Commission. 

The Commission understands that 

commenters are concerned that foreign 

entities, in order to avoid swap dealer 

status, may decrease their swap dealing 

business with foreign branches of U.S. 

registered swap dealers and guaranteed 

affiliates that are swap dealers. 

Therefore, the Commission’s policy, 

based on its interpretation of section 2(i) 

of the CEA, will be that swap dealing 

transactions with a foreign branch of a 

U.S. swap dealer or with guaranteed 

affiliates that are swap dealers should 

generally be excluded from the de 

minimis calculations of non-U.S. 

persons that are not guaranteed or 

conduit affiliates.311 However, the 

Commission is not persuaded that 

similar concerns arise regarding foreign 

entities that may engage in swap dealing 

business with such persons.312

With regard to non-U.S. persons that 

are not guaranteed or conduit affiliates 

of U.S. persons, such non-U.S. persons 

also generally would not count toward 

their de minimis thresholds their swap 

dealing transactions with a guaranteed 

affiliate that is not a swap dealer and 

itself engages in de minimis swap 

dealing activity and which is affiliated 

with a swap dealer. This interpretation 

reflects the Commission’s view that 

when the aggregate level of swap 

dealing by a non-U.S. person that is not 

a guaranteed affiliate, considering both 

swaps with U.S. persons and swaps 

with unregistered guaranteed affiliates 

(together with any swap dealing 

transactions that the non-U.S. person 

aggregates for purposes of the de 

minimis calculation as described below) 

exceeds the de minimis level of swap 

dealing, the non-U.S. person’s swap 

dealing transactions have the requisite 

‘‘direct and significant connection with 

activities in, or effect on, commerce of 

the United States.’’ 313 The Commission 

believes, however, that where the 

counterparty to a swap is a guaranteed 

affiliate and is not a registered swap 

dealer, the Commission’s regulatory 

concerns are addressed because the 

guaranteed affiliate engages in a level of 

swap dealing below the de minimis 

threshold and is part of an affiliated 

group with a swap dealer. 

In addition, non-U.S. persons that are 

not guaranteed or conduit affiliates of 

U.S. persons also generally would not 

count toward their de minimis 

thresholds their swap dealing 

transactions with a guaranteed affiliate 

where the guaranteed affiliate is 

guaranteed by a non-financial entity.314

This exception is appropriate given that 

the risks to the U.S. financial markets 

are mitigated because the U.S. guarantor 

is a non-financial entity. 

The Commission notes that under its 

interpretation of section 2(i), a non-U.S. 

person that is not a guaranteed or 

conduit affiliate would not have to 

count its swap dealing transactions with 

other non-U.S. persons that are not 

guaranteed affiliates because, in the 

Commission’s view, such swap dealing 

activity would not have the requisite 

‘‘direct and significant connection with 

activities in, or effect on, U.S. 

commerce.’’ 

d. Exclusion of Certain Swaps by NonU.S. Persons From the MSP Calculation 

Related to their discussion of the 

swap dealer de minimis threshold, some 

commenters, such as SIFMA and Citi, 

stated that a non-U.S. person should not 

have to include swaps with foreign 

branches of U.S. swap dealers towards 

the MSP calculation.315

The Commission has considered 

whether, under section 2(i), the swaps 

that a non-U.S. person that is not a 

guaranteed or conduit affiliate enters 

into with a foreign branch of a U.S. 

swap dealer or a guaranteed affiliate that 

is a swap dealer should be excluded 

from the calculation of the non-U.S. 

person’s MSP registration threshold. 

The Commission notes that its policy 

regarding such swaps for purposes of 

the MSP registration may reasonably be 

distinguished from its policy for 

purposes of the swap dealer registration 

threshold calculation. As described in 

the Final Entities Rules, MSP 

registration is required for non-dealers 

with swaps positions so large as to pose 

systemic risk. This is in contrast to swap 

dealer registration, which is a functional 

test focused on the nature of activities 

conducted by a potential registrant. 

Consequently, if all swaps between a 

non-U.S. person and foreign branches of 

U.S. swap dealers or swap dealers that 

are guaranteed affiliates were generally 

excluded under the Commission’s 

policy with respect to MSP registration, 

a market participant that poses systemic 

risk within the meaning of the MSP 

definition could potentially be relieved 

of the requirement to register as an MSP. 

The Commission believes that such an 

outcome could undermine the MSP 

registration scheme. However, the 

Commission is persuaded that it is 

possible to control the potential risk of 

the non-U.S. person’s risk with foreign 

branches of U.S. swap dealers and 

guaranteed affiliates that are swap 

dealers under certain limited 

circumstances and therefore that limited 

interpretive relief from the MSP 

calculation requirement is 

appropriate.316 Thus, a non-U.S. person 

that is not a guaranteed affiliate of a U.S. 

person and is a financial entity 

generally does not have to count toward 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45325 

317See Commission regulation 23.600(c)(4)(ii), 

requiring swap dealers and MSPs to have credit risk 

policies and procedures that account for daily 

measurement of overall credit exposure to comply 

with counterparty credit limits, and monitoring and 

reporting of violations of counterparty credit limits 

performed by personnel that are independent of the 

business trading unit. See also Commission 

regulation 23.600(c)(1)(i), requiring the senior 

management and the governing body of each swap 

dealer and MSP to review and approve credit risk 

tolerance limits for the swap dealer or MSP. 

318See Final Entities Rules at 30689, stating the 

Commission’s interpretation that ‘‘an entity’s swap 

. . . positions in general would be attributed to a 

parent, other affiliate or guarantor for purposes of 

the major participant analysis to the extent that the 

counterparties to those position would have 

recourse to that other entity in connection with the 

position.’’ The Commission stated further that 

‘‘entities will be regulated as major participants 

when they pose a high level of risk in connection 

with the swap . . . positions they guarantee.’’ 

319See CEA section 2(h)(7)(C) for a definition of 

financial entity. 

320Based on data the Bank for International 

Settlements obtained from thirteen reporting 

countries (Australia, Belgium, Canada, France, 

Germany, Italy, Japan, the Netherlands, Spain, 

Sweden, Switzerland, the United Kingdom and the 

United States), at the end of December 2012, 

notional amounts outstanding for OTC foreign 

exchange derivatives, interest rate derivatives, and 

credit default swaps with non-financial customers 

accounted for an average of less than 8 percent of 

the total aggregate amounts outstanding for these 

asset classes. See Bank for International 

Settlements, Statistical release: OTC derivatives 

statistics at end-December 2012 (May 2013), 

available at http://www.bis.org/publ/ 

otc_hy1305.pdf. 

321See BCBS IOSCO, Margin Requirements for 

Non-Centrally Cleared Derivatives, Second 

Consultative Document, at 7 (issued for comment 

March 15, 2013), available at http://www.bis.org/ 

publ/bcbs242.pdf. 

322As used herein, a registered FBOT means an 

FBOT that is registered with the Commission 

pursuant to part 48 of the regulations in order to 

permit direct access to the FBOT’s order entry and 

trade matching system from within the U.S. Among 

others, 16 FBOTs that currently permit direct access 

for the trading of futures and option contracts, but 

not swaps, pursuant to no-action relief letters 

issued by Commission staff have submitted 

complete applications for registration. In light of the 

fact that registered FBOTs can also list swaps for 

trading by direct access and in view of the time 

required to properly assess registration applications 

and the interest on the part of certain FBOTs 

operating pursuant to the no-action relief in listing 

swaps for trading by direct access, the Division of 

Market Oversight has determined to amend the 16 

no-action letters to permit those FBOTs, subject to 

certain conditions, to also list swaps for trading by 

direct access. Accordingly, all provisions in this 

document that apply to registered FBOTs also apply 

to the 16 FBOTs permitting trading by direct access 

pursuant to the amended no-action relief. 

323The Commission notes that while the real-time 

reporting requirement will be satisfied for cleared 

swaps executed anonymously on a DCM or SEF, 

absent further affirmative actions by an FBOT, the 

requirement will not be satisfied through FBOT 

execution alone. See section G, infra. 

324A swap that is submitted for clearing is 

extinguished upon novation and replaced by new 

swap(s) that result from novation. See Commission 

regulation 39.12(b)(6). See also Derivatives Clearing 

Organization General Provisions and Core 

Principles, 76 FR 69334, 69361 (Nov. 8, 2011). 

325SIFMA (Aug. 27, 2012) at A32. Along similar 

lines, IIB commented that there might be 

Continued 

its MSP threshold its exposure under 

swaps with foreign branches of a U.S. 

swap dealer or guaranteed affiliates that 

are swap dealers; provided, that the 

swap is either cleared, or the 

documentation of the swap requires the 

foreign branch or guaranteed affiliate to 

collect daily variation margin, with no 

threshold, on its swaps with such nonU.S. person. When this condition is met, 

the Commission believes that it would 

generally be appropriate for the nonU.S. person not to count its exposure 

under such swaps against its MSP 

threshold. 

The Commission notes that a non-U.S. 

person’s swaps positions with 

guaranteed affiliates that are swap 

dealers and foreign branches of U.S. 

swap dealers must be addressed in the 

latter entities’ risk management 

programs. Such programs must account 

for, among other things, overall credit 

exposures to non-U.S. persons.317

Second, the Commission notes that a 

non-U.S. person’s swaps with a 

guaranteed affiliate that is a swap dealer 

would be included in exposure 

calculations and attributed to the U.S. 

guarantor for purposes of determining 

whether the U.S. guarantor’s swap 

exposures are systemically-important on 

a portfolio basis and therefore require 

the protections provided by MSP 

registration.318

Finally, a non-U.S. person that is not 

a guaranteed affiliate and is not a 

financial entity 319 would generally not 

have to count toward its MSP thresholds 

its exposure under swaps with a foreign 

branch of a U.S. swap dealer or 

guaranteed affiliate that is a swap 

dealer. This exclusion reflects the 

Commission’s recognition of the more 

modest risk to the U.S. financial markets 

from swaps activities with non-financial 

entities organized outside the United 

States.320 Further, the Commission 

notes that the Basel Committee on 

Banking Supervision (‘‘BCBS’’) and the 

International Organization of Securities 

Commissions (‘‘IOSCO’’) have recently 

issued a second consultative document 

under which, if finalized, would not 

apply margin requirements to the noncentrally cleared derivatives of nonfinancial entities, given that such 

transactions are viewed as posing little 

or no systemic risk and are exempt from 

clearing mandates in most 

jurisdictions.321

e. Exclusion of Certain Swaps Executed 

Anonymously on a SEF, DCM, or 

Foreign Board of Trade (‘‘FBOT’’) and 

Cleared 

The Commission believes that when a 

non-U.S. person that is not a guaranteed 

or conduit affiliate enters into swaps 

anonymously on a registered DCM, SEF, 

or FBOT 322 and such swaps are cleared, 

the non-U.S. person would generally not 

have to count such swaps against its de 

minimis threshold. The Commission 

understands that in these 

circumstances, the non-U.S. person 

would not have any prior information 

regarding its counterparty to the swap. 

Also, as discussed below, the 

Commission is interpreting CEA section 

2(i) such that, where a swap between 

such a non-U.S. person and a U.S. 

person is executed anonymously on a 

registered DCM, SEF, or FBOT and 

cleared the non-U.S. person generally 

will satisfy all of the applicable 

Category A Transaction-Level 

Requirements 323 that pertain to such a 

swap transaction. The Commission 

believes that the regulatory interest in 

including such swaps in the non-U.S. 

person’s de minimis calculation is 

outweighed by the practical difficulties 

involved in determining whether the 

non-U.S. person should include the 

swap in the calculation, given that the 

non-U.S. person would have no 

information regarding its swap 

counterparty prior to execution of the 

swap. 

The Commission also believes that 

when a non-U.S. person that is not a 

guaranteed or conduit affiliate clears a 

swap through a registered derivatives 

clearing organization (‘‘DCO’’), such 

non-U.S. person would generally not 

have to count the resulting swap (i.e., 

the novated swap) against its swap 

dealer de minimis threshold or MSP 

threshold.324 Where a swap is created 

by virtue of novation, such swap does 

not implicate swap dealing, and 

therefore it would not be appropriate to 

include such swaps in determining 

whether a non-U.S. person should 

register as a swap dealer. 

f. MSP-Parent Guarantees 

While under the Proposed Guidance 

swaps conducted by a non-U.S. person, 

where guaranteed by a U.S. person, 

would generally be attributed only to 

the U.S. person in determining who 

must register as an MSP, the 

Commission did not expressly address a 

guarantee by a non-U.S. person of the 

swaps obligations of its U.S. subsidiary. 

In SIFMA’s view, the Proposed 

Guidance created ambiguity as to the 

treatment of guarantees between other 

types of entities (e.g., where a U.S. 

person is guaranteed by a non-U.S. 

person or where a non-U.S. person is 

guaranteed by a non-U.S. person).325 In 

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45326 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

circumstances under which a wholly-owned 

subsidiary of a person already registered as a swap 

dealer enters into swaps with U.S. persons where 

its obligations are guaranteed by the swap dealer. 

IIB (Aug. 27, 2012) at 25. 

326Cleary (Aug. 16, 2012) at 12. 

327See Final Entities Rules, 77 FR at 30689. 

addition, Cleary noted that the 

Commission determined in the Final 

Entities Rules not to include a parental 

guarantee of a subsidiary’s swaps in the 

computation of the parent’s outward 

exposure under the MSP definition 

where the subsidiary is subject to 

capital oversight by the Commission, 

SEC, or an appropriate banking 

regulator. They asked that the 

Commission consider extending 

comparable treatment for parental 

guarantees where the non-U.S. 

subsidiary is subject to Basel-compliant 

capital oversight by another G20 

prudential supervisor.326

Under the Commission’s 

interpretation of section 2(i) of the CEA, 

the discussion in the Final Entities 

Rules regarding attribution of swaps 

positions of guaranteed persons for 

purposes of the MSP definition should 

generally apply to non-U.S. persons. 

That is, as applied to non-U.S. persons, 

where there is no guarantee or recourse 

to another person under the swap, the 

swap should generally be attributed to 

the person who enters into the swap, 

and there generally would be no 

attribution or aggregation of the swaps 

position with the swaps positions of the 

person’s affiliates.327 On the other hand, 

where the counterparty to the swap 

would have recourse to another person, 

such as a parent guarantor, the swap 

should generally be attributed to the 

person to whom there is recourse. Thus, 

if a U.S. person enters into a swap 

guaranteed by a non-U.S. person, the 

swap should generally be attributed to 

the non-U.S. person, and if a non-U.S. 

person enters into a swap guaranteed by 

a U.S. person, the swap should 

generally be attributed to the U.S. 

person. 

However, the Commission is also 

cognizant that, as a matter of 

international comity, regulation of nonU.S. persons can be less preferable 

where the same regulatory outcomes can 

be achieved by regulating an affiliated 

U.S. person. So where the swaps of a 

U.S. person are guaranteed by a nonU.S. person, the Commission would 

consider the possibility that registration 

of the non-U.S. person would not be 

required if the U.S. person registers as 

an MSP, and there may be 

circumstances where registration of the 

U.S. person would be preferable. Also, 

the same considerations of international 

comity suggest that regulation of nonU.S. persons should be effected in a 

manner that generally does not interfere 

with non-U.S. regulation. Thus, the 

Commission would be willing to 

consider that the swaps positions of 

non-U.S. persons that are guaranteed by 

other non-U.S. persons may be 

attributed to either the non-U.S. 

guarantor or the guaranteed non-U.S. 

person so long as all of the swaps 

positions that would trigger MSP 

registration are subject to the MSP 

registration and regulatory 

requirements. Thus, in IIB’s scenario, 

the non-U.S.-based bank may consult 

with the Commission and decide to 

register itself—or its subsidiaries—as an 

MSP. The Commission would generally 

not expect both the parent guarantor 

bank and the guaranteed bank to register 

as MSPs. In the Commission’s view, the 

related risk concerns should be 

adequately addressed by requiring 

either the guarantor or the guaranteed 

person to register, provided that the 

swap activities giving rise to MSP 

registration are regulated under DoddFrank. 

As to Cleary’s request regarding 

comparable treatment for certain 

parental guarantees, the Commission 

agrees that, as a matter of policy, it 

would generally be appropriate to 

extend similar treatment to parental 

guarantees of a subsidiary that is subject 

to comparable and comprehensive 

capital oversight by a G20 prudential 

supervisor. In this respect, the 

Commission views Basel-compliant 

capital standards as sufficiently 

comparable and comprehensive to 

capital oversight by the Commission, 

SEC, or banking regulator. Thus, where 

a subsidiary is subject to Baselcompliant capital standards and 

oversight by a G20 prudential 

supervisor, the subsidiary’s positions 

would generally not be attributed to a 

parental guarantor in the computation of 

the parent’s outward exposure under the 

MSP definition. 

4. Summary 

The Commission’s policy under this 

Guidance may be summarized as 

follows. 

The Commission will generally apply 

the aggregation principle (as articulated 

in the Final Entities Rules) such that, in 

considering whether a person is engaged 

in more than a de minimis level of swap 

dealing, a person (whether U.S. or nonU.S.) should generally include all 

relevant dealing swaps of all its U.S. 

and non-U.S. affiliates under common 

control, except that swaps of an affiliate 

(either U.S. or non-U.S.) that is a 

registered swap dealer are excluded. For 

this purpose, consistent with the 

Commission’s policy on counting swap 

transactions towards the de minimis 

threshold for swap dealer registration 

detailed above, the dealing swaps of an 

affiliate under common control with 

such person would include: 

(i) In the case of a U.S. person or a 

guaranteed or conduit affiliate, all its swap 

dealing transactions; and 

(ii) in the case of a non-U.S. person that is 

not a guaranteed or conduit affiliate: 

a. all dealing swaps with counterparties 

who are U.S. persons (other than foreign 

branches of U.S. swap dealers); and 

b. all dealing swaps with guaranteed 

affiliates except: 

i. guaranteed affiliates that are swap 

dealers; 

ii. guaranteed affiliates that are not swap 

dealers but which are affiliated with a swap 

dealer and where the guaranteed affiliate 

itself engages in de minimis swap dealing 

activity; 

iii. guaranteed affiliates that are guaranteed 

by a non-financial entity. 

In addition, a non-U.S. affiliate that is not 

a guaranteed or conduit affiliate may exclude 

any swaps that are entered into anonymously 

on a registered DCM, SEF, or FBOT and 

cleared, as more fully discussed above. 

The Commission’s interpretation 

would allow both U.S. persons and nonU.S. persons in an affiliated group to 

engage in unregistered swap dealing 

activity up to the de minimis level for 

the entire group. When the affiliated 

group nears the de minimis threshold in 

the aggregate, it would have to register 

a number of affiliates (inside or outside 

the United States) as swap dealers 

sufficient to maintain the relevant 

dealing swaps of the unregistered 

affiliates below the threshold. 

In determining whether a non-U.S. 

person holds swap positions above the 

MSP thresholds, the non-U.S. person 

should consider the aggregate notional 

value of: 

(i) Any swap position between it and a U.S. 

person; 

(ii) any swap position between it and a 

guaranteed affiliate (but its swap positions 

where its own obligations thereunder are 

guaranteed by a U.S. person should be 

attributed to that U.S. person and not 

included in the non-U.S. person’s 

determination); and 

(iii) any swap position between another 

(U.S. or non-U.S.) person and a U.S. person 

or guaranteed affiliate, where it guarantees 

the obligations of the other person 

thereunder. 

A non-U.S. person that is not a 

guaranteed affiliate of a U.S. person and 

is a financial entity would generally not 

have to count toward its MSP thresholds 

its exposure under swaps with foreign 

branches of U.S. swap dealers or 

guaranteed affiliates that are swap 

dealers, provided that the swap is either 

cleared, or the documentation of the 

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328See CEA section 2(h)(7)(C) for a definition of 

financial entity. 

329See the January Order, 78 FR at 873 n. 123. 

330 Id. at 873. 

swap requires the foreign branch or 

guaranteed affiliate to, and the swap 

dealer actually does, collect daily 

variation margin, on its swaps with the 

non-U.S. person. 

In addition, a non-U.S. person that is 

not a guaranteed affiliate and is not a 

financial entity 328 would generally not 

have to count toward its MSP thresholds 

its exposure under swaps with a foreign 

branch or guaranteed affiliate, in each 

case that is a swap dealer. 

C. Interpretation of the Term ‘‘Foreign 

Branch;’’ When a Swap Should Be 

Considered To Be With the Foreign 

Branch of a U.S. Person That Is a Swap 

Dealer or MSP 

1. Interpretation of the Term ‘‘Foreign 

Branch’’ and Treatment of Foreign 

Branches 

As discussed above, the Commission 

considers a foreign branch of a U.S. 

person to be a part of the U.S. person. 

Thus, in the Proposed Guidance, the 

Commission proposed that the U.S. 

person would be legally responsible for 

complying with all applicable EntityLevel Requirements. Under this 

approach, the foreign branch of the U.S. 

person would not register separately as 

a swap dealer. The Commission believes 

that this approach is appropriate 

because a foreign branch of a U.S. swap 

dealer is an integral part of a U.S. swap 

dealer and not a separate legal entity. 

In the Proposed Guidance, the 

Commission also proposed interpreting 

2(i) so that where a swap is with a 

foreign branch of a U.S.-based swap 

dealer, irrespective of whether the 

counterparty is a U.S. person or nonU.S. person, the foreign branch would 

be expected to comply with most of the 

Transaction-Level Requirements. The 

Commission stated that this proposed 

approach is appropriate in light of the 

Commission’s strong supervisory 

interests in entities that are a part or an 

extension of a U.S.-based swap dealer. 

The Commission also proposed 

interpreting 2(i) so that swaps between 

a foreign branch of a U.S. person and a 

non-U.S. person counterparty 

(irrespective of whether that non-U.S. 

person counterparty’s obligations under 

the swap are guaranteed by a U.S. 

person or not) would be eligible for 

substituted compliance with respect to 

Category A Transaction-Level 

Requirements. As discussed further 

below, where the counterparty to a swap 

with a foreign branch is a non-U.S. 

person (whether or not swaps such nonU.S. person is guaranteed or otherwise 

supported by, or is an affiliate conduit 

of, a U.S. person), the Commission 

continues to be of the view that the 

swap should be eligible for substituted 

compliance with respect to Category A 

Transaction-Level Requirements, to the 

extent applicable, in light of the 

supervisory interest of the foreign 

jurisdiction in the execution and 

clearing of trades occurring in that 

jurisdiction. As discussed further in 

section F below, the Commission’s 

recognition of substituted compliance 

would be based on an evaluation of 

whether the requirements of the home 

jurisdiction are comparable and 

comprehensive to the applicable 

requirement(s) under the CEA and 

Commission regulations based on a 

consideration of all relevant factors, 

including among other things: (i) The 

comprehensiveness of the foreign 

regulator’s supervisory compliance 

program and (ii) the authority of such 

foreign regulator to support and enforce 

its oversight of the registrant’s branch or 

agency with regard to such activities to 

which substituted compliance applies. 

In the January Order, the Commission 

gave exemptive relief from TransactionLevel Requirements during the 

pendency of the January Order for 

swaps between a foreign branch of a 

U.S. swap dealer or U.S. MSP and a 

non-U.S. counterparty (including a nonU.S. swap dealer or non-U.S. MSP). 

Thus, notwithstanding the 

Commission’s view that the foreign 

branch of a U.S. swap dealer is a U.S. 

person, the Commission granted 

temporary relief during the pendency of 

the January Order for swaps between a 

foreign branch of a U.S. registrant and 

a non-U.S. swap dealer, allowing the 

non-U.S. swap dealer to treat the foreign 

branch as a non-U.S. person. 

In the January Order, the Commission 

also stated that because it believes a 

swap between two foreign branches of 

U.S. registrants is a swap between two 

U.S. persons, such swaps are fully 

subject to the Transaction-Level 

Requirements. Nevertheless, during the 

pendency of the January Order, the 

Commission determined it would be 

appropriate to permit foreign branches 

of U.S. registrants to comply only with 

transaction-level requirements required 

in the location of the foreign branch 

while the Commission further 

considered, and worked with 

international regulators regarding, the 

treatment of foreign branches of U.S. 

registrants. However, for purposes of 

this relief, the Commission stated that 

for a swap between foreign branches of 

U.S. registrants, the swap would be 

treated as with the foreign branch of a 

U.S. person when: (i) The personnel 

negotiating and agreeing to the terms of 

the swap are located in the jurisdiction 

of such foreign branch; (ii) the 

documentation of the swap specifies 

that the counterparty or ‘‘office’’ for the 

U.S. person is such foreign branch; and 

(iii) the swap is entered into by such 

foreign branch in its normal course of 

business (collectively the ‘‘January 

Order Criteria’’). If the swap failed to 

satisfy all three of the January Order 

Criteria, the Commission stated that the 

swap would be treated as a swap of the 

U.S. person and not as a swap of the 

foreign branch of the U.S. person, and 

would not be eligible for relief from 

transaction-level requirements under 

the January Order.329

The Commission also stated in the 

January Order that as part of the 

Commission’s further consideration of 

this issue, additional factors may be 

relevant to the consideration of whether 

a swap is with the foreign branch of a 

U.S. person. These factors could 

include, for example, that: 

(i) The foreign branch is the location of 

employment of the employees negotiating the 

swap for the U.S. person or, if the swap is 

executed electronically, the employees 

managing the execution of the swap; 

(ii) the U.S. person treats the swap as a 

swap of the foreign branch for tax purposes, 

(iii) the foreign branch operates for valid 

business reasons and is not only a 

representative office of the U.S. person; and 

(iv) the branch is engaged in the business 

of banking or financing and is subject to 

substantive regulation in the jurisdiction 

where it is located (collectively the 

‘‘Additional Factors’’).330

The Commission also sought 

comment from market participants and 

other interested parties regarding 

whether it is appropriate to include 

these or other factors in the 

consideration of when a swap is with 

the foreign branch of a U.S. person. 

2. Comments 

The Commission received several 

comments on how the Commission 

should determine whether a swap is 

‘‘with a foreign branch,’’ both with 

regard to swaps between a foreign 

branch and a non-U.S. swap dealer and 

swaps between two foreign branches of 

U.S. swap dealers. In addition, several 

organizations commented on the term 

‘‘foreign branch’’ of a U.S. bank. 

Commenters stated that in 

determining whether a swap between a 

non-U.S. swap dealer and a non-U.S. 

branch of a U.S. bank is bona fide with 

the non-U.S. branch, the Commission 

should look to whether the swap is 

booked in the foreign branch (as defined 

in Regulation K), and that the four 

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45328 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

331See SIFMA/CH/FSR (Feb. 6, 2013) at B18–20; 

State Street (Feb. 6, 2013) at 2–4. 

332See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at 

B18. 

333 Id. at B17. 

334State Street (Feb. 6, 2013) at 3–4. 

335State Street (Feb. 6, 2013) at 2. 

336See SIFMA/CH/FSR (Feb. 6, 2013) at B18; 

State Street (Feb. 6, 2013) at 2. 

337See SIFMA/CH/FSR (Feb. 6, 2013) at B19. 

338See id. at B19–20. 

339Better Markets (Feb. 15, 2013) at 2, 4–5. 

additional factors that the Commission 

stated it was considering are 

unnecessary.331 These commenters 

stated that the first Additional Factor 

being considered (i.e., that the foreign 

branch is the location of employment of 

the employees negotiating the swap for 

the U.S. person or, if the swap is 

executed electronically, the employees 

managing the execution of the swap) 

should be deleted because employees 

that negotiate and agree to the terms of 

a swap may be located outside of the 

non-U.S. branch that books the trade for 

a variety of valid reasons.332 Similar 

arguments were made with regard to the 

first prong of the January Order Criteria 

(i.e., that the personnel negotiating and 

agreeing to the terms of the swap are 

located in the jurisdiction of such 

foreign branch).333 As noted above, 

State Street stated that in a global 

economy, foreign exchange swaps are 

negotiated 24 hours a day, by parties in 

various locations. Therefore, the 

physical location of employees has little 

connection to the legal jurisdiction of 

the branch in which the swaps are 

booked. Determination of the branch in 

which the swap is booked is influenced 

by a number of factors, including the 

convenience of the swap counterparty 

and agreements between counterparties 

to book swaps to mutually agreeable and 

preferred locations. State Street further 

stated that limiting the ability to book 

transactions to a foreign branch would 

be inappropriate for U.S. dealers in 

foreign exchange because foreign 

exchange transactions are typically 

negotiated in large blocks, which 

combine the orders of a variety of asset 

owners, and which can include both 

U.S. persons and non-U.S. persons. 

Once negotiated and executed, these 

blocks are allocated to the various asset 

owners, and booked to the location 

preferred by the asset owner or in some 

cases the dealer’s non-U.S. branch. This 

allows managers to trade foreign 

exchange more efficiently, using a single 

point of dealer contact, and ensures that 

all asset owners on whose behalf they 

are trading receive the same price. State 

Street also stated that the approach 

outlined in proposal would place U.S. 

businesses at a competitive 

disadvantage, as non-U.S. owners would 

be unwilling to do business that would 

subject them to the U.S. regulatory 

requirements.334

A commenter stated that it does not 

strongly object to prongs 2, 3 and 4 of 

the Additional Factors (that the swap is 

treated as a swap of the foreign branch 

for tax purposes, that the branch 

operates for valid business reasons and 

is not only a representative office, and 

that the branch is engaged in banking or 

financing and subject to substantive 

local regulation) since they could ‘‘be 

reasonable indicia of a bona fide nonU.S. branch of a U.S. swap dealer.’’ 

However, this commenter stated that 

each of these prongs may be challenging 

to properly define and evaluate.335

With respect to the proposed tax 

prong (prong 2 of the Additional 

Factors), other commenters stated that 

the income from a swap that is booked 

in a foreign branch of a U.S. person is 

subject to taxation in the local 

jurisdiction in which the foreign branch 

is resident, which demonstrates that 

such swaps are bona fide with the nonU.S. branch. The commenters further 

noted that a foreign tax credit is 

generally allowed for income taxes paid 

locally.336

With regard to prong 3 of the 

Additional Factors (that the branch 

operates for valid business reasons and 

is not only a representative office), as 

noted earlier, SIFMA/CH/FSR argued 

that the only criteria that is relevant in 

determining whether a swap is bona 

fide with a foreign branch of a U.S. 

swap dealer is whether the swap is 

booked in the foreign branch (as 

reflected in the trade confirm), with the 

term ‘‘foreign branch’’ defined with 

reference to Regulation K. These 

commenters stated that the definition of 

a foreign branch in Regulation K makes 

it clear that a foreign branch of a U.S. 

bank is not a ‘‘representative office.’’ In 

addition, Regulation K is a 

comprehensive regulation of the Federal 

Reserve Board that ensures that foreign 

branches operate for valid reasons.337

With regard to prong 4 of the 

Additional Factors (that the branch is 

engaged in banking or financing and 

subject to substantive local regulation), 

SIFMA/CH/FSR argue that this prong is 

unnecessary because, in addition to 

being regulated under Regulation K by 

the Federal Reserve, foreign branches 

are also subject to substantive local 

regulation and supervision, including 

licensing requirements and potentially 

local derivatives rules that the 

Commission could find to constitute 

substituted compliance. Although these 

commenters acknowledged that the 

nature and scope of these regulations 

will vary by jurisdiction, they state that 

many foreign jurisdictions require the 

same level of compliance with local 

regulations that U.S. regulators require 

of U.S. branches of foreign banks with 

regards to U.S. laws and regulations. 

They also stated that requiring foreign 

branches to show that they are subject 

to substantive regulation in their local 

jurisdiction so as to determine whether 

each swap they enter into is bona fide 

would be overly burdensome and 

unnecessary. In their view, the only 

relevant factor that the Commission 

should consider is whether the swap 

has been booked into the foreign branch, 

which the trade confirm would 

reflect.338

Conversely, one commenter argued 

that, consistent with clear evidence 

from the last crisis that the risks accrued 

by foreign branches, guaranteed 

subsidiaries, and even non-guaranteed 

subsidiaries all flow back to the parent 

entity, foreign branches of U.S. persons 

should under no circumstances be 

subject to weaker regulation than the 

parent company. This commenter also 

argues that there is no substantive 

difference between a branch and a 

subsidiary of a U.S. person in terms of 

covering derivatives losses, and that 

both must be held to the same high 

standards as apply to the U.S. person 

itself. Otherwise, the U.S. taxpayer will 

be exposed to the risk of another 

massive bailout.339 In addition, this 

commenter stated that claims made by 

industry groups that foreign branches of 

U.S. entities should not be classified as 

U.S. persons or they will find no foreign 

counterparties willing to do business 

with them are absurd and 

unsubstantiated, and taken literally, 

seem to suggest that the Commission 

should exempt all overseas swap 

activity from the requirements of Title 

VII of the Dodd-Frank Act, which would 

directly violate Congress’s clear intent. 

3. Commission Guidance 

In preparing the Guidance, the 

Commission has carefully considered 

commenters’ concerns and 

recommendations related to both the 

appropriate scope of the term ‘‘foreign 

branch’’ for purposes of this Guidance 

and Commission consideration of when 

a swap should be considered to be 

‘‘with the foreign branch’’ of a U.S. bank 

that is a swap dealer or MSP. 

a. Scope of the Term ‘‘Foreign Branch’’ 

The Commission notes that foreign 

branches of a U.S. bank are part of a 

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340As discussed further in section G, under the 

Commission’s interpretation of 2(i), in the case of 

a swap with a U.S. swap dealer or U.S. MSP 

(including an affiliate of a non-U.S. person, and 

including a foreign branch of a U.S. bank that is a 

swap dealer or MSP), the parties to the swap 

generally would not be not eligible for substituted 

compliance with one exception—where the swap is 

between the foreign branch of a U.S. bank that is 

a swap dealer or MSP and a non-U.S. person 

(regardless of whether the non-U.S. person is 

guaranteed or otherwise supported by, or is an 

affiliate conduit of, a U.S. person). 

341Regulation K is a regulation issued by the 

Board of Governors of the Federal Reserve (‘‘Federal 

Reserve Board’’) under the authority of the Federal 

Reserve Act (‘‘FRA’’) (12 U.S.C. 221 et seq.); the 

Bank Holding Company Act of 1956 (‘‘BHC Act’’) 

(12 U.S.C. 1841 et seq.) and the International 

Banking Act of 1978 (‘‘IBA’’) (12 U.S.C. 3101 et 

seq.). Regulation K sets forth rules governing the 

international and foreign activities of U.S. banking 

organizations, including procedures for establishing 

foreign branches to engage in international banking. 

Under Regulation K, 12 CFR part 211, a ‘‘foreign 

branch’’ is defined as ‘‘an office of an organization 

(other than a representative office) that is located 

outside the country in which the organization is 

legally established and at which a banking or 

financing business is conducted.’’ See 17 CFR 

211.2(k). 

342 12 CFR part 347 is a regulation issued by the 

Federal Deposit Insurance Corporation under the 

authority of the Federal Deposit Insurance Act (12 

U.S.C. 1828(d)(2)), which sets forth rules governing 

the operation of foreign branches of insured state 

nonmember banks (‘‘FDIC International Banking 

Regulation’’). Under 12 CFR 347.102(j), a ‘‘foreign 

branch’’ is defined as ‘‘an office or place of business 

located outside the United States, its territories, 

Puerto Rico, Guam, American Samoa, the Trust 

Territory of the Pacific Islands, or the Virgin 

Islands, at which banking operations are conducted, 

but does not include a representative office.’’ 

343The Commission notes that national banks 

operating foreign branches are required under 

section 25 of the Federal Reserve Act, 12 U.S.C. 

604a, to conduct the accounts of each foreign 

branch independently of the accounts of other 

foreign branches established by it and of its home 

office, and are required at the end of each fiscal 

period to transfer to its general ledger the profit or 

loss accrued at each branch as a separate item. 

344See notes 341 and 342 above and 

accompanying text for additional information 

regarding the definition of a ‘‘foreign branch’’ in 

Regulation K and the FDIC International Banking 

Regulation. 

345The Commission notes that section 25 of the 

Federal Reserve Act, 12 U.S.C. 604a, states that 

national banking associations with $1 million or 

more in capital and surplus may file an application 

with the Board of Governors of the Federal Reserve 

System for permission to exercise certain powers, 

including establishment of foreign branches. In 

addition, section 25(9) requires that every national 

banking association operating foreign branches 

conduct the accounts of each foreign branch 

independently of the accounts of other foreign 

branches established by it and of its home office, 

and at the end of each fiscal period transfer to its 

general ledger the profit or loss accrued at each 

branch as a separate item. 

346See section B, supra. 

347See section G, infra. 

U.S. bank rather than a separate legal 

entity, and are therefore ‘‘U.S. persons.’’ 

Nevertheless, as a policy matter, the 

Commission believes that CEA section 

2(i) should be interpreted so as to 

exclude swap dealing transactions with 

a foreign branch of a U.S. swap dealer 

from the de minimis calculations for 

swap dealer or MSP registration. In 

addition, the Commission believes that 

CEA section 2(i) should be interpreted 

so that swaps between a foreign branch 

of a U.S. swap dealer or MSP and a nonU.S. person should be eligible for 

substituted compliance with regard to 

Category A Transaction-Level 

Requirements.340 The Commission 

believes that CEA section 2(i) should be 

interpreted in this manner in order to 

avoid the potential result that foreign 

entities would cease doing swap dealing 

business with foreign branches of U.S. 

registered swap dealers. However, the 

Commission notes that interpreting CEA 

section 2(i) in this manner creates a 

distinction between swaps with foreign 

branches of U.S. banks and swaps with 

the U.S. principal bank. Therefore, the 

Commission also believes that 

Commission consideration of both the 

scope of the term ‘‘foreign branch’’ and 

when a swap is with the foreign branch 

of a U.S. bank should be construed 

under CEA section 2(i) in a manner that 

does not create unnecessary distinctions 

between otherwise similar activities. 

Therefore, the Commission interprets 

CEA section 2(i) such that, for purposes 

of this Guidance, the Commission will 

generally consider a ‘‘foreign branch’’ of 

a U.S. swap dealer or U.S. MSP to be 

any ‘‘foreign branch’’ (as defined in the 

applicable banking regulation) of a U.S. 

bank that is: (i) Subject to Regulation 

K 341 or the FDIC International Banking 

Regulation,342 or otherwise designated 

as a ‘‘foreign branch’’ by the U.S. bank’s 

primary regulator, (ii) maintains 

accounts independently of the home 

office and of the accounts of other 

foreign branches with the profit or loss 

accrued at each branch determined as a 

separate item for each foreign branch,343

and (iii) subject to substantive 

regulation in banking or financing in the 

jurisdiction where it is located (the 

‘‘Foreign Branch Characteristics’’). 

However, in addition to the foregoing 

Foreign Branch Characteristics, the 

Commission will consider other 

relevant facts and circumstances in 

considering whether a foreign office of 

a U.S. bank is a ‘‘foreign branch’’ of a 

U.S. bank for purposes of this Guidance. 

Further, for purposes of this 

Guidance, the Commission interprets 

CEA section 2(i) so that generally a 

foreign branch of a U.S. bank could 

include an office of a foreign bank that 

satisfies the foregoing Foreign Branch 

Characteristics. However, a foreign 

branch of a U.S. bank would generally 

not include an affiliate of a U.S. bank 

that is incorporated or organized as a 

separate legal entity. 

In considering the scope of the term 

‘‘foreign branch,’’ the Commission 

agrees with commenters that stated that 

Regulation K of the Federal Reserve 

Board’s regulations provides a useful 

reference because Regulation K provides 

a comprehensive regime for regulation 

of foreign branches that ensures that 

foreign branches of U.S. banks operate 

for valid reasons and are not 

‘‘representative offices.’’ Similarly, the 

Commission believes that the FDIC 

International Banking Regulation 

provides a useful reference for U.S. 

banks that have foreign branches which 

are subject to FDIC jurisdiction.344

In addition, regardless of a foreign 

branch of a U.S. bank is subject to 

Regulation K or the FDIC International 

Banking Regulation or is otherwise 

designated as a ‘‘foreign branch’’ by the 

U.S. bank’s primary regulator, the 

Commission believes that CEA section 

2(i) should be interpreted so that, for 

purposes of this Guidance, a foreign 

branch of a U.S. bank should generally 

also be subject to substantive regulation 

in banking or financing in the 

jurisdiction where it is located. Finally, 

the Commission believes that in order 

for a foreign office of a U.S. bank to be 

viewed as a ‘‘foreign branch’’ for 

purposes of this Guidance, another 

factor should generally be present—the 

foreign branch should maintain its 

accounts independently of the home 

office and of the accounts of other 

foreign branches, and at the end of each 

fiscal period the U.S. bank should 

transfer to its general ledger the profit or 

loss accrued at each branch as a separate 

item.345

b. Commission Consideration of 

Whether a Swap Is With a Foreign 

Branch of a U.S. Bank 

With regard to Commission 

consideration of whether a swap by a 

U.S. bank through a foreign office 

should be considered to be ‘‘with a 

foreign branch’’ of the U.S. person for 

purposes of the de minimis calculations 

for swap dealer and MSP registration 346

or application of the Transaction-Level 

Requirements 347 under this Guidance, 

the Commission has carefully 

considered the comments submitted on 

this question. 

SIFMA/CH/FSR stated that the only 

criteria that is relevant in determining 

whether a swap is bona fide with a 

foreign branch of a U.S. swap dealer is 

whether the swap is booked in the 

foreign branch (as reflected in the trade 

confirmation), with the term ‘‘foreign 

branch’’ defined with reference to 

Regulation K. However, the 

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45330 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

348See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at 

B18; State Street (Feb. 6, 2013) at 2–4. 

349See State Street (Feb. 6, 2013) at 2. 

350See, e.g., SIFMA/CH/FSR (Feb. 6, 2013) at 

B18. 

Commission’s view is that the trade 

confirmation generally is not relevant 

for purposes of determining whether to 

treat a swap as being with a foreign 

branch of a U.S. bank rather than with 

the U.S. principal bank. In reality, 

because the foreign branch of a U.S. 

bank is not a separate legal entity, the 

U.S. principal bank would generally be 

the party that is ultimately responsible 

for a swap with its foreign branch. The 

Commission’s view is that a foreign 

branch of a U.S. bank should be 

considered a ‘‘U.S. person’’ under this 

Guidance because it is a part of the U.S. 

bank. Moreover, Better Markets has 

argued that foreign branches of U.S. 

banks as well as foreign subsidiaries and 

affiliates should be treated exactly the 

same as U.S. persons in all respects 

under this Guidance. 

However, in light of principles of 

international comity and giving 

consideration to comments that state 

that foreign branches of U.S. banks will 

be at a competitive disadvantage if 

foreign branches of U.S. banks are not 

treated the same as non-U.S. persons, 

the Commission believes that in 

considering whether a swap should be 

considered as being with the foreign 

branch of a U.S. bank under this 

Guidance, all of the facts and 

circumstances are relevant. In 

particular, the Commission’s view is 

that if all of the following factors are 

present, generally the swap should be 

considered to be with the foreign branch 

of a U.S. bank for purposes of this 

Guidance: 

(i) The employees negotiating and agreeing 

to the terms of the swap (or, if the swap is 

executed electronically, managing the 

execution of the swap), other than employees 

with functions that are solely clerical or 

ministerial, are located in such foreign 

branch or in another foreign branch of the 

U.S. bank; 

(ii) the foreign branch or another foreign 

branch is the office through which the U.S. 

bank makes and receives payments and 

deliveries under the swap on behalf of the 

foreign branch pursuant to a master netting 

or similar trading agreement, and the 

documentation of the swap specifies that the 

office for the U.S. bank is such foreign 

branch; 

(iii) the swap is entered into by such 

foreign branch in its normal course of 

business; 

(iv) the swap is treated as a swap of the 

foreign branch for tax purposes; and 

(v) the swap is reflected in the local 

accounts of the foreign branch. 

However, if material terms of the 

swap are negotiated or agreed to by 

employees of the U.S. bank located in 

the United States, the Commission 

believes that generally the swap should 

be considered to be with the U.S. 

principal bank, rather than its foreign 

branch, for purposes of this Guidance. 

The Commission also believes that the 

factors enumerated above would be 

relevant both to an analysis of whether 

a swap should be considered to be 

between a foreign branch of a U.S. bank 

and a non-U.S. swap dealer and an 

analysis of whether a swap should be 

considered to be between two foreign 

branches of U.S. banks. The 

Commission discusses each of the 

enumerated factors in more detail 

below. 

The first of the five factors 

enumerated above is similar to prong 1 

of the Additional Factors (whether the 

employees negotiating the swap for the 

U.S. person are located in the foreign 

branch, or if the swap is executed 

electronically, the employees managing 

the execution of the swap); however, the 

first factor above considers whether the 

employees negotiating and agreeing to 

the terms of the swap are located in any 

foreign branch of the U.S. bank. This 

modification addresses the objection of 

commenters that stated that employees 

that negotiate and agree to swaps are 

often located outside the foreign branch 

for bona fide reasons.348 However, to the 

extent that material terms of the swap 

are negotiated or agreed by employees of 

the U.S. bank located in the United 

States, the Commission believes that 

generally the swap should be 

considered to be with the U.S. principal 

bank for purposes of this Guidance. 

The second factor above is similar to 

prong (ii) of the January Order Criteria 

(that the documentation of the swap 

specifies that the counterparty or 

‘‘office’’ for the U.S. person is such 

foreign branch). However, because a 

foreign branch of a U.S. bank is not a 

separate legal entity, the Commission 

believes that the U.S. principal bank 

generally should be considered to be the 

counterparty for purposes of this 

Guidance irrespective of whether the 

foreign branch is named as the 

counterparty in the swap 

documentation. Therefore, the 

Commission has modified the second 

factor, consistent with its other 

interpretations of section 2(i), so that it 

makes no reference to the foreign branch 

as counterparty. Rather, the second 

factor above relates to whether the 

foreign branch or another foreign branch 

is the office through which the U.S. 

bank makes and receives payments and 

deliveries under the swap on behalf of 

the foreign branch pursuant to a master 

netting or similar trading agreement, 

and whether the documentation of the 

swap specifies that the office for the 

U.S. bank is such foreign branch. This 

modification is consistent with the 

ISDA Master Agreement, which requires 

that each party specify an ‘‘office’’ for 

each swap, which is where a party 

‘‘books’’ a swap and/or the office 

through which the party makes and 

receives payments and deliveries. 

The third factor above (whether the 

swap is entered into by such foreign 

branch in its normal course of business) 

is the same as prong (iii) in the January 

Order Criteria discussed above. The 

Commission is concerned about the 

material terms of a swap being 

negotiated or agreed by employees of 

the U.S. bank that are located in the 

United States and then routed to a 

foreign branch in order for the swap to 

be treated as a swap with the foreign 

branch for purposes of the de minimis 

calculations for swap dealer and MSP 

registration or application of the 

Transaction-Level Requirements under 

this Guidance. 

The fourth factor above (whether the 

swap is treated as a swap of the foreign 

branch for tax purposes) is the same as 

prong 2 of the Additional Factors. The 

Commission notes that State Street 

stated that it does not strongly object to 

prongs 2, 3 and 4 of the Additional 

Factors (that the swap is treated as a 

swap of the foreign branch for tax 

purposes, that the branch operates for 

valid business reasons and is not only 

a representative office, and that the 

branch is engaged in banking or 

financing and subject to substantive 

local regulation) since they could ‘‘be 

reasonable indicia of a bona fide nonU.S. branch of a U.S. swap dealer.’’ 

However, State Street stated that each of 

these prongs may be challenging to 

properly define and evaluate.349 Other 

commenters stated that the income from 

a swap that is booked in a foreign 

branch of a U.S. person is subject to 

taxation in the local jurisdiction in 

which the foreign branch is resident, 

which demonstrates that such swaps are 

bona fide with the non-U.S. branch.350

The Commission notes that the fourth 

factor above only refers to whether the 

tax treatment of the swap is consistent 

with the swap being treated as a swap 

of the foreign branch for tax purposes. 

The fifth factor above focuses on 

whether the swap is reflected in the 

accounts of the foreign branch. The 

Commission believes that where a swap 

is bona fide with the foreign branch of 

a U.S. bank, it generally would be 

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351See, e.g., SIFMA (Feb. 3, 2011); ISDA (Jan. 24, 

2011); Cleary (Sept. 20, 2011); Barclays Bank PLC, 

BNP Paribas S.A., Deutsche Bank AG, Royal Bank 

of Canada, The Royal Bank of Scotland Group PLC, 

Societe Generale, and UBS AG (Jan. 11, 2011); 

Barclays Bank PLC, BNP Paribas S.A., Credit Suisse 

AG, Deutsche Bank AG, HSBC, Nomura Securities 

International, Inc., Rabobank Nederland, Royal 

Bank of Canada, The Royal Bank of Scotland Group 

PLC, Societe Generale, The Toronto-Dominion 

Bank, and UBS AG (Feb. 17, 2011). 

352See, e.g., SocGen (Aug. 8, 2012) at 6; IIB (Aug. 

27, 2012) at 2; Clearing House (Aug. 27, 2012) at 

22. 

353See 7 U.S.C. 6s(e)(2)(B). Section 4s(e) of the 

CEA explicitly requires the adoption of rules 

establishing capital and margin requirements for 

swap dealers and MSPs, and applies a bifurcated 

approach that requires each swap dealer and MSP 

for which there is a U.S. prudential regulator to 

meet the capital and margin requirements 

established by the applicable prudential regulator, 

and each swap dealer and MSP for which there is 

no prudential regulator to comply with the 

Commission’s capital and margin regulations. See 7 

U.S.C. 6s(e). Further, systemically important 

financial institutions (‘‘SIFIs’’) that are not FCMs 

would be exempt from the Commission’s capital 

requirements, and would comply instead with 

Federal Reserve Board requirements applicable to 

SIFIs, while nonbank (and non-FCM) subsidiaries of 

U.S. bank holding companies would calculate their 

Commission capital requirement using the same 

methodology specified in Federal Reserve Board 

regulations applicable to the bank holding 

company, as if the subsidiary itself were a bank 

holding company. The term ‘‘prudential regulator’’ 

is defined in CEA section 1a(39) as the Board of 

Governors of the Federal Reserve System, the Office 

of the Comptroller of the Currency, the Federal 

Deposit Insurance Corporation, the Farm Credit 

Administration, and the Federal Housing Finance 

Agency. See 7 U.S.C. 1a(39). In addition, in the 

proposed capital regulations for swap dealers and 

MSPs, the Commission solicited comment regarding 

whether it would be appropriate to permit swap 

dealers and MSPs to use internal models for 

computing market risk and counterparty credit risk 

charges for capital purposes if such models had 

been approved by a foreign regulatory authority and 

were subject to periodic assessment by such foreign 

regulatory authority. See Capital Requirements of 

Swap Dealers and Major Swap Participants, 76 FR 

27802 (May 12, 2011) (‘‘Proposed Capital 

Requirements’’). 

354See 7 U.S.C. 6s(e)(3)(A). 

355See 7 U.S.C. 6s(e). See also Proposed Capital 

Requirements, 76 FR at 27817 (‘‘The Commission’s 

capital proposal for [swap dealers] and MSPs 

Continued 

reflected in the foreign branch’s 

accounts. 

D. Description of the Entity-Level and 

Transaction-Level Requirements 

Title VII of the Dodd-Frank Act 

establishes a comprehensive new 

regulatory framework for swap dealers 

and MSPs that Congress enacted with 

the goal of reducing systemic risk and 

enhancing market transparency. Under 

this framework, a swap dealer or MSP 

must, among other things, comport with 

certain standards (and regulations as the 

Commission may promulgate) governing 

risk management, internal and external 

business conduct, and reporting. 

Further, swap dealers and MSPs are 

required to comply with all of the 

requirements applicable to swap dealers 

and MSPs for all their swaps, not just 

the swaps that make them a swap dealer 

or MSP. 

Even before the Commission 

published the Proposed Guidance, a 

number of commenters recommended 

that the Commission, in interpreting the 

cross-border applicability of the DoddFrank Act swaps provisions, should 

distinguish between requirements that 

apply at an entity level (i.e., to the firm 

as a whole) as compared to those that 

apply at a transactional level (i.e., to the 

individual swap transaction or trading 

relationship).351 These commenters 

argued that requirements that relate to 

the core operations of a firm and should 

be applied to the entity as a whole 

would include the capital and related 

prudential requirements and 

recordkeeping, as well as certain risk 

mitigation requirements (e.g., 

information barriers and the designation 

of a chief compliance officer). The 

commenters stated that other 

requirements, such as margin, should 

apply on transaction-by-transaction 

basis and only to swaps with U.S. 

counterparties. 

Commenters on the Proposed 

Guidance generally supported the 

division of Dodd-Frank’s swaps 

provisions (and Commission regulations 

thereunder) into Entity-Level and 

Transaction-Level Requirements.352

Certain of these commenters, however, 

made specific recommendations for 

reclassification of some of these 

Requirements, which are discussed in 

section E below. 

The Commission agrees with the 

commenters that the various DoddFrank Act swaps provisions applicable 

to swap dealers and MSPs can be 

conceptually separated into Entity-Level 

Requirements, which apply to a swap 

dealer or MSP firm as a whole, and 

Transaction-Level Requirements, which 

apply on a transaction-by-transaction 

basis. Descriptions of each of the EntityLevel Requirements under this 

Guidance are set out immediately 

below, followed by descriptions of the 

Transaction-Level Requirements. 

Additional information related to the 

categorization of Entity-Level and 

Transaction-Level Requirements is 

discussed in section E. 

1. Description of the Entity-Level 

Requirements 

The Entity-Level Requirements under 

Title VII of the Dodd-Frank Act and the 

Commission’s regulations promulgated 

thereunder relate to: (i) Capital 

adequacy; (ii) chief compliance officer; 

(iii) risk management; (iv) swap data 

recordkeeping; (v) swap data repository 

reporting (‘‘SDR Reporting’’); and (vi) 

physical commodity large swaps trader 

reporting (‘‘Large Trader Reporting’’). 

The Entity-Level Requirements apply to 

registered swap dealers and MSPs 

across all their swaps without 

distinctions as to the counterparty or the 

location of the swap (although under 

this Guidance in some circumstances 

the availability of substituted 

compliance may vary based on whether 

the counterparty is a U.S. person or a 

non-U.S. person). 

The Entity-Level Requirements are 

split into two categories. The first 

category of Entity-Level Requirements 

includes capital adequacy, chief 

compliance officer, risk management, 

and swap data recordkeeping under 

Commission regulations 23.201 and 

23.203 (except certain aspects of swap 

data recordkeeping relating to 

complaints and sales materials) (‘‘First 

Category’’). The second category of 

Entity-Level Requirements includes 

SDR Reporting, certain aspects of swap 

data recordkeeping relating to 

complaints and marketing and sales 

materials under Commission regulations 

23.201(b)(3) and 23.201(b)(4) and Large 

Trader Reporting (‘‘Second Category’’). 

Each of the Entity-Level Requirements 

is discussed in the subsections that 

follow. 

a. First Category of Entity-Level 

Requirements 

i. Capital Adequacy 

Section 4s(e)(2)(B) of the CEA 

specifically directs the Commission to 

set capital requirements for swap 

dealers and MSPs that are not subject to 

the capital requirements of U.S. 

prudential regulators (hereinafter 

referred to as ‘‘non-bank swap dealers or 

MSPs’’).353 With respect to the use of 

swaps that are not cleared, these 

requirements must: ‘‘(1) [h]elp ensure 

the safety and soundness of the swap 

dealer or major swap participant; and 

(2) [be] appropriate for the risk 

associated with the non-cleared swaps 

held as a swap dealer or major swap 

participant.’’ 354 Pursuant to section 

4s(e)(3), the Commission proposed 

regulations, which would require nonbank swap dealers and MSPs to hold a 

minimum level of adjusted net capital 

(i.e., ‘‘regulatory capital’’) based on 

whether the non-bank swap dealer or 

MSP is: (i) Also a FCM; (ii) not an FCM, 

but is a non-bank subsidiary of a bank 

holding company; or (iii) neither an 

FCM nor a non-bank subsidiary of a 

bank holding company.355 The primary 

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includes a minimum dollar level of $20 million. A 

non-bank [swap dealer] or MSP that is part of a U.S. 

bank holding company would be required to 

maintain a minimum of $20 million of Tier 1 

capital as measured under the capital rules of the 

Federal Reserve Board. [A swap dealer] or MSP that 

also is registered as an FCM would be required to 

maintain a minimum of $20 million of adjusted net 

capital as defined under [proposed] section 1.17. In 

addition, [a swap dealer] or MSP that is not part of 

a U.S. bank holding company or registered as an 

FCM would be required to maintain a minimum of 

$20 million of tangible net equity, plus the amount 

of the [swap dealer’s] or MSP’s market risk 

exposure and OTC counterparty credit risk 

exposure.’’). 

356See 7 U.S.C. 6s(k). 

357 7 U.S.C. 6s(j). 

358Swap Dealer and Major Swap Participant 

Recordkeeping, Reporting, and Duties Rules; 

Futures Commission Merchant and Introducing 

Broker Conflicts of Interest Rules; and Chief 

Compliance Officer Rules for Swap Dealers, Major 

Swap Participants, and Futures Commission 

Merchants, 77 FR 20128 (Apr. 3, 2012) (‘‘Final 

Swap Dealer and MSP Recordkeeping Rule’’) 

(relating to risk management program, monitoring 

of position limits, business continuity and disaster 

recovery, conflicts of interest policies and 

procedures, and general information availability, 

respectively). 

359Customer Clearing Documentation, Timing of 

Acceptance for Clearing, and Clearing Member Risk 

Management, 77 FR 21278 (Apr. 9, 2012) (‘‘Final 

Customer Documentation Rules’’). Also, swap 

dealers must comply with Commission regulation 

23.608, which prohibits swap dealers providing 

clearing services to customers from entering into 

agreements that would: (i) disclose the identity of 

a customer’s original executing counterparty; (ii) 

limit the number of counterparties a customer may 

trade with; (iii) impose counterparty-based position 

limits; (iv) impair a customer’s access to execution 

of a trade on terms that have a reasonable 

relationship to the best terms available; or (v) 

prevent compliance with specified time frames for 

acceptance of trades into clearing. 

360 7 U.S.C. 6s(f)(1)(B). 

361 7 U.S.C. 6s(g)(1). 

362See 17 CFR part 46; Swap Data Recordkeeping 

and Reporting Requirements: Pre-Enactment and 

Transition Swaps, 76 FR 22833 (Apr. 25, 2011) 

(‘‘Proposed Data Rules’’). 

363 7 U.S.C. 2(a)(13)(G). 

364 7 U.S.C. 24a. 

purpose of the capital requirement is to 

reduce the likelihood and cost of a swap 

dealer’s or MSP’s default by requiring a 

financial cushion that can absorb losses 

in the event of the firm’s default. 

ii. Chief Compliance Officer 

Section 4s(k) requires that each swap 

dealer and MSP designate an individual 

to serve as its chief compliance officer 

(‘‘CCO’’) and specifies certain duties of 

the CCO.356 Pursuant to section 4s(k), 

the Commission adopted regulation 3.3, 

which requires swap dealers and MSPs 

to designate a CCO who would be 

responsible for administering the firm’s 

compliance policies and procedures, 

reporting directly to the board of 

directors or a senior officer of the swap 

dealer or MSP, as well as preparing and 

filing with the Commission a certified 

report of compliance with the CEA. The 

chief compliance function is an integral 

element of a firm’s risk management and 

oversight and the Commission’s effort to 

foster a strong culture of compliance 

within swap dealers and MSPs. 

iii. Risk Management 

Section 4s(j) of the CEA requires each 

swap dealer and MSP to establish 

internal policies and procedures 

designed to, among other things, 

address risk management, monitor 

compliance with position limits, 

prevent conflicts of interest, and 

promote diligent supervision, as well as 

maintain business continuity and 

disaster recovery programs.357 The 

Commission adopted implementing 

regulations 23.600, 23.601, 23.602, 

23.603, 23.605, and 23.606).358 The 

Commission also adopted regulation 

23.609, which requires certain risk 

management procedures for swap 

dealers or MSPs that are clearing 

members of a DCO.359 Collectively, 

these requirements help to establish a 

robust and comprehensive internal risk 

management program for swap dealers 

and MSPs, which is critical to effective 

systemic risk management for the 

overall swaps market. 

iv. Swap Data Recordkeeping (Except 

Certain Aspects of Swap Data 

Recordkeeping Relating to Complaints 

and Sales Materials) 

CEA section 4s(f)(1)(B) requires swap 

dealers and MSPs to keep books and 

records for all activities related to their 

business.360 Sections 4s(g)(1) and (4) 

require swap dealers and MSPs to 

maintain trading records for each swap 

and all related records, as well as a 

complete audit trail for comprehensive 

trade reconstructions.361 Pursuant to 

these provisions, the Commission 

adopted regulations 23.201and 23.203, 

which require swap dealers and MSPs 

to keep records including complete 

transaction and position information for 

all swap activities, including 

documentation on which trade 

information is originally recorded. 

Pursuant to Commission regulation 

23.203, records of swaps must be 

maintained for the duration of the swap 

plus 5 years, and voice recordings for 1 

year, and records must be ‘‘readily 

accessible’’ for the first 2 years of the 5 

year retention period. Swap dealers and 

MSPs also must comply with Parts 43, 

45 and 46 of the Commission’s 

regulations, which, respectively, 

address the data recordkeeping and 

reporting requirements for all swaps 

subject to the Commission’s 

jurisdiction, including swaps entered 

into before the date of enactment of the 

Dodd-Frank Act (‘‘pre-enactment 

swaps’’) and swaps entered into on or 

after the date of enactment of the DoddFrank Act but prior to the compliance 

date of the swap data reporting rules 

(‘‘transition swaps’’).362

b. Second Category of Entity-Level 

Requirements 

i. SDR Reporting 

CEA section 2(a)(13)(G) requires all 

swaps, whether cleared or uncleared, to 

be reported to a registered SDR.363 CEA 

section 21 requires SDRs to collect and 

maintain data related to swaps as 

prescribed by the Commission, and to 

make such data electronically available 

to particular regulators under specified 

conditions related to confidentiality.364

Part 45 of the Commission’s regulations 

(and Appendix 1 thereto) sets forth the 

specific swap data that must be reported 

to a registered SDR, along with 

attendant recordkeeping requirements; 

and part 46 addresses recordkeeping 

and reporting requirements for preenactment and transition swaps 

(‘‘historical swaps’’). The fundamental 

goal of part 45 of the Commission’s 

regulations is to ensure that complete 

data concerning all swaps subject to the 

Commission’s jurisdiction is maintained 

in SDRs where it will be available to the 

Commission and other financial 

regulators for fulfillment of their various 

regulatory mandates, including systemic 

risk mitigation, market monitoring and 

market abuse prevention. Part 46 

supports similar goals with respect to 

pre-enactment and transition swaps and 

ensures that data needed by regulators 

concerning ‘‘historical’’ swaps is 

available to regulators through SDRs. 

Among other things, data reported to 

SDRs will enhance the Commission’s 

understanding of concentrations of risks 

within the market, as well as promote a 

more effective monitoring of risk 

profiles of market participants in the 

swaps market. The Commission also 

believes that there are benefits that will 

accrue to swap dealers and MSPs as a 

result of the timely reporting of 

comprehensive swap transaction data 

and consistent data standards for 

recordkeeping, among other things. 

Such benefits include more robust risk 

monitoring and management 

capabilities for swap dealers and MSPs, 

which in turn will improve the 

monitoring of their current swaps 

market positions. 

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365 7 U.S.C. 6s(f)(1). 

366 7 U.S.C. 6s(h)(1); see 7 U.S.C. 6s(h)(3). 

367Final Swap Dealer and MSP Recordkeeping 

Rule, 77 FR 20128. 

368 17 CFR 23.201(b)(3)(i). 

369 17 CFR 23.201(b)(4). 

370 7 U.S.C. 6t. 

371Large Trader Reporting for Physical 

Commodity Swaps, 76 FR 43851 (July 22, 2011). 

The rules require routine position reporting by 

clearing organizations, as well as clearing members 

and swap dealers with reportable positions in the 

covered physical commodity swaps. The rules also 

establish recordkeeping requirements for clearing 

organizations, clearing members and swap dealers, 

as well as traders with positions in the covered 

physical commodity swaps that exceed a prescribed 

threshold. In general, the rules apply to swaps that 

are linked, directly or indirectly, to either the price 

of any of the 46 U.S. listed physical commodity 

futures contracts the Commission enumerates 

(Covered Futures Contracts) or the price of the 

physical commodity at the delivery location of any 

of the Covered Futures Contracts. 

372 7 U.S.C. 2(h)(1), (7). 

373Clearing Requirement Determination Under 

Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 

2012) (‘‘Clearing Requirement Determination’’). 

374A DCO’s eligibility to clear swaps that are 

required to be cleared pursuant to section 2(h)(1)(A) 

of the CEA and part 50 of the Commission’s 

regulations is governed by regulation 39.5(a), 

relating to DCO eligibility. 

ii. Swap Data Recordkeeping Relating to 

Complaints and Marketing and Sales 

Materials 

CEA section 4s(f)(1) requires swap 

dealers and MSPs to ‘‘make such reports 

as are required by the Commission by 

rule or regulation regarding the 

transactions and positions and financial 

condition of the registered swap dealer 

or MSP.’’ 365 Additionally, CEA section 

4s(h) requires swap dealers and MSPs to 

‘‘conform with such business conduct 

standards . . . as may be prescribed by 

the Commission by rule or 

regulation.’’ 366 Pursuant to these 

provisions, the Commission 

promulgated final rules that set forth 

certain reporting and recordkeeping for 

swap dealers and MSPs.367 Commission 

Regulation 23.201 states that ‘‘[e]ach 

swap dealer and major swap participant 

shall keep full, complete, and 

systematic records of all activities 

related to its business as a swap dealer 

or major swap participant.’’ Such 

records must include, among other 

things, ‘‘[a] record of each complaint 

received by the swap dealer or major 

swap participant concerning any 

partner, member, officer, employee, or 

agent,’’ 368 as well as ‘‘[a]ll marketing 

and sales presentations, advertisements, 

literature, and communications.’’ 369

iii. Physical Commodity Large Swaps 

Trader Reporting (Large Trader 

Reporting) 

CEA section 4t authorizes the 

Commission to establish a large trader 

reporting system for significant price 

discovery swaps (of which the 

economically equivalent swaps subject 

to part 20 of the Commission’s 

regulations are a subset).370 Pursuant 

thereto, the Commission adopted its 

Large Trader Reporting rules (part 20 of 

the Commission’s regulations), which 

require routine reports from swap 

dealers, among other entities, that hold 

significant positions in swaps that are 

linked, directly or indirectly, to a 

prescribed list of U.S.-listed physical 

commodity futures contracts.371

Additionally, Large Trader Reporting 

requires that swap dealers, among other 

entities, comply with certain 

recordkeeping obligations. 

2. Description of the Transaction-Level 

Requirements 

The Transaction-Level Requirements 

include: (i) Required clearing and swap 

processing; (ii) margining (and 

segregation) for uncleared swaps; (iii) 

mandatory trade execution; (iv) swap 

trading relationship documentation; (v) 

portfolio reconciliation and 

compression; (vi) real-time public 

reporting; (vii) trade confirmation; (viii) 

daily trading records; and (ix) external 

business conduct standards. 

The Transaction-Level 

Requirements—with the exception of 

external business conduct standards— 

relate to both risk mitigation and market 

transparency. Certain of these 

requirements, such as clearing and 

margining, serve to lower a firm’s risk 

of failure. In that respect, these 

Transaction-Level Requirements could 

be classified as Entity-Level 

Requirements. Other Transaction-Level 

Requirements—such as trade 

confirmation, swap trading relationship 

documentation, and portfolio 

reconciliation and compression—also 

serve important risk mitigation 

functions, but are less closely connected 

to risk mitigation of the firm as a whole 

and thus are more appropriately applied 

on a transaction-by-transaction basis. 

Likewise, the requirements related to 

trade execution, trade confirmation, 

daily trading records, and real-time 

public reporting have a closer nexus to 

the transparency goals of the DoddFrank Act, as opposed to addressing the 

risk of a firm’s failure. 

As a result, whether a particular 

requirement of Title VII should apply on 

a transaction-by-transaction basis in the 

context of cross-border activity for 

purposes of section 2(i) of the CEA 

requires the Commission to exercise 

some degree of judgment. Nevertheless, 

in the interest of comity principles, the 

Commission believes that the 

Transaction-Level Requirements may be 

applied on a transaction-by-transaction 

basis. The Transaction-Level 

Requirements are split into two 

categories. All of the Transaction-Level 

Requirements except external business 

conduct standards are in Category A. 

The external business conduct 

standards are in Category B. 

Each of the Transaction-Level 

Requirements is discussed below. 

a. Category A: Risk Mitigation and 

Transparency 

i. Required Clearing and Swap 

Processing 

Section 2(h)(1) of the CEA requires a 

swap to be submitted for clearing to a 

DCO if the Commission has determined 

that the swap is required to be cleared, 

unless one of the parties to the swap is 

eligible for an exception from the 

clearing requirement and elects not to 

clear the swap.372 Clearing via a DCO 

mitigates the counterparty credit risk 

between swap dealers or MSPs and their 

counterparties. 

Commission regulations 

implementing the first designations of 

swaps for required clearing were 

published in the Federal Register on 

December 13, 2012.373 Under 

Commission regulation 50.2, all persons 

executing a swap that is included in a 

class of swaps identified under 

Commission regulation 50.4 must 

submit such swap to an eligible DCO for 

clearing as soon as technologically 

practicable after execution, but in any 

event by the end of the day of execution. 

Regulation 50.4 establishes required 

clearing for certain classes of swaps. 

Currently, those classes include, for 

credit default swaps: Specified series of 

untranched North American CDX 

indices and European iTraxx indices; 

and for interest rate swaps: Fixed-tofloating swaps, basis swaps, forward 

rate agreements referencing U.S. Dollar, 

Euro, Sterling, and Yen, and overnight 

index swaps referencing U.S. Dollar, 

Euro, and Sterling. Each of the six 

classes is further defined in Commission 

regulation 50.4. Swaps that have the 

specifications identified in the 

regulation are required to be cleared and 

must be cleared pursuant to the rules of 

any eligible DCO 374 unless an exception 

or exemption specified in the CEA or 

the Commission’s regulations applies. 

Generally, if a swap is subject to CEA 

section 2(h)(1)(A) and part 50 of the 

Commission’s regulations, it must be 

cleared through an eligible DCO, unless: 

(i) One of the counterparties is eligible 

for and elects the end-user exception 

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375See End-User Exception to the Clearing 

Requirement for Swaps, 77 FR 42560 (July 19, 2012) 

(‘‘End-User Exception’’). 

376The Commission has adopted an exemption 

from required clearing for swaps between certain 

affiliated entities. Exemption for Swaps Between 

Certain Affiliated Entities, 78 FR 21750 (Apr. 11, 

2013) (‘‘Inter-Affiliate Exemption’’). 

377 17 CFR 23.506 and 23.610. See also Final 

Customer Documentation Rules, 77 FR 21278. 

378See section H regarding the application of 

required clearing rules to market participants that 

are not registered as swap dealers or MSPs, 

including the circumstances under which the 

parties to such swaps would be eligible for 

substituted compliance. 

379See 7 U.S.C. 6s(e). See also Margin 

Requirements for Uncleared Swaps for Swap 

Dealers and Major Swap Participants, 76 FR 23732, 

23733–23740 (Apr. 28, 2011) (‘‘Proposed Margin 

Requirements’’). Section 4s(e) explicitly requires 

the adoption of rules establishing margin 

requirements for swap dealers and MSPs, and 

applies a bifurcated approach that requires each 

swap dealer and MSP for which there is a 

prudential regulator to meet the margin 

requirements established by the applicable 

prudential regulator, and each swap dealer and 

MSP for which there is no prudential regulator to 

comply with the Commission’s margin regulations. 

In contrast, the segregation requirements in section 

4s(1) do not use a bifurcated approach—that is, all 

swap dealers and MSPs are subject to the 

Commission’s regulations regarding notice and 

third party custodians for margin collected for 

uncleared swaps. 

380See 7 U.S.C. 2(h)(8). 

381See Process for a Designated Contract Market 

or Swap Execution Facility To Make a Swap 

Available to Trade, Swap Transaction Compliance 

and Implementation Schedule, and Trade Execution 

Requirement Under the Commodity Exchange Act, 

78 FR 33606 (Jun. 4, 2013). 

382See also Confirmation, Portfolio 

Reconciliation, Portfolio Compression, and Swap 

Trading Relationship Documentation Requirements 

for Swap Dealers and Major Swap Participants; 77 

FR 55904 (Sept. 11, 2012) (‘‘Final Confirmation 

Rules’’). 

383The requirement under section 4s(i) relating to 

trade confirmations is a Transaction-Level 

Requirement. Accordingly, Commission regulation 

23.504(b)(2) requires a swap dealer’s and MSP’s 

swap trading relationship documentation to include 

all confirmations of swaps, will apply on a 

transaction-by-transaction basis. 

384See also Final Confirmation Rules, 77 FR 

55964. 

385See id. 

under Commission regulation 50.50; 375

or (ii) both counterparties are eligible for 

and elect an inter-affiliate exemption 

under Commission regulation 50.52.376

To elect either the End-User Exception 

or the Inter-Affiliate Exemption, the 

electing party or parties and the swap 

must meet certain requirements set forth 

in the regulations. 

Closely connected with the clearing 

requirement are the following swap 

processing requirements: (i) 

Commission regulation 23.506, which 

requires swap dealers and MSPs to 

submit swaps promptly for clearing; and 

(ii) Commission regulations 23.610 and 

39.12, which establish certain standards 

for swap processing by DCOs and/or 

swap dealers and MSPs that are clearing 

members of a DCO.377 Together, 

required clearing and swap processing 

requirements promote safety and 

soundness of swap dealers and MSPs, 

and mitigate the credit risk posed by 

bilateral swaps between swap dealers or 

MSPs and their counterparties.378

ii. Margin and Segregation 

Requirements For Uncleared Swaps 

Section 4s(e) of the CEA requires the 

Commission to set margin requirements 

for swap dealers and MSPs that trade in 

swaps that are not cleared.379 The 

margin requirements ensure that 

outstanding current and potential future 

risk exposures between swap dealers 

and their counterparties are 

collateralized, thereby reducing the 

possibility that swap dealers or MSPs 

take on excessive risks without having 

adequate financial backing to fulfill 

their obligations under the uncleared 

swap. In addition, with respect to swaps 

that are not submitted for clearing, 

section 4s(l) requires that a swap dealer 

or MSP notify the counterparty of its 

right to request that funds provided as 

margin be segregated, and upon such 

request, to segregate the funds with a 

third-party custodian for the benefit of 

the counterparty. In this way, the 

segregation requirement enhances the 

protections offered through margining 

uncleared swaps and thereby provides 

additional financial protection to 

counterparties. The Commission is 

working with foreign and domestic 

regulators to develop and finalize 

appropriate regulations for margin and 

segregation requirements. 

iii. Trade Execution 

Integrally linked to the clearing 

requirement is the trade execution 

requirement, which is intended to bring 

the trading of swaps that are required to 

be cleared and are made available to 

trade onto regulated exchanges or 

execution facilities. Specifically, section 

2(h)(8) of the CEA provides that unless 

a clearing exception applies and is 

elected, a swap that is subject to a 

clearing requirement must be executed 

on a DCM or SEF, unless no such DCM 

or SEF makes the swap available to 

trade.380 Commission regulations 

implementing the process for a DCM or 

SEF to make a swap available to trade 

were published in the Federal Register 

on June 4, 2013.381 Under Commission 

regulations 37.10 and 38.12, 

respectively, a SEF or DCM may submit 

a determination for Commission review 

that a mandatorily cleared swap is 

available to trade based on enumerated 

factors. By requiring the trades of 

mandatorily cleared swaps that are 

made available to trade to be executed 

on an exchange or an execution 

facility—each with its attendant preand post-trade transparency and 

safeguards to ensure market integrity— 

the trade execution requirement furthers 

the statutory goals of financial stability, 

market efficiency, and enhanced 

transparency. 

iv. Swap Trading Relationship 

Documentation 

CEA section 4s(i) requires each swap 

dealer and MSP to conform to 

Commission standards for the timely 

and accurate confirmation, processing, 

netting, documentation and valuation of 

swaps. Pursuant thereto, Commission 

regulation 23.504(a) requires swap 

dealers and MSPs to ‘‘establish, 

maintain and enforce written policies 

and procedures’’ to ensure that the swap 

dealer or MSP executes written swap 

trading relationship documentation.382

Under Commission regulation 23.504(b), 

the swap trading relationship 

documentation must include, among 

other things: All terms governing the 

trading relationship between the swap 

dealer or MSP and its counterparty; 

credit support arrangements; investment 

and re-hypothecation terms for assets 

used as margin for uncleared swaps; and 

custodial arrangements.383 Further, the 

swap trading relationship 

documentation requirement applies to 

all swaps with registered swap dealers 

and MSPs. In addition, Commission 

regulation 23.505 requires swap dealers 

and MSPs to document certain 

information in connection with swaps 

for which exceptions from required 

clearing are elected.384 Swap 

documentation standards facilitate 

sound risk management and may 

promote standardization of documents 

and transactions, which are key 

conditions for central clearing, and lead 

to other operational efficiencies, 

including improved valuation. 

v. Portfolio Reconciliation and 

Compression 

CEA section 4s(i) directs the 

Commission to prescribe regulations for 

the timely and accurate processing and 

netting of all swaps entered into by 

swap dealers and MSPs. Pursuant to 

CEA section 4s(i), the Commission 

adopted regulations (23.502 and 

23.503), which require swap dealers and 

MSPs to perform portfolio reconciliation 

and compression, respectively, for all 

swaps.385 Portfolio reconciliation is a 

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386For example, the reduced transaction count 

may decrease operational risk as there are fewer 

trades to maintain, process, and settle. 

387See Confirmation, Portfolio Reconciliation, 

and Portfolio Compression Requirements for Swap 

Dealers and Major Swap Participants, 75 FR 81519 

(Dec. 28, 2010) (‘‘Confirmation NPRM’’). 

388See 7 U.S.C. 2(a)(13). See also Real-Time 

Public Reporting of Swap Transaction Data, 77 FR 

1182, 1183 (Jan. 9, 2012) (‘‘Final Real-Time 

Reporting Rule’’). 

389Part 43 defines a ‘‘publicly reportable swap 

transaction’’ as (i) any swap that is an arm’s-length 

transaction between two parties that results in a 

corresponding change in the market risk position 

between the two parties; or (ii) any termination, 

assignment, novation, exchange, transfer, 

amendment, conveyance, or extinguishing of rights 

or obligations of a swap that changes the pricing of 

a swap. See Final Real-Time Reporting Rule, 77 FR 

1182. 

390Final Swap Dealer and MSP Recordkeeping 

Rule, 77 FR at 20205. 

391See Final Real-Time Reporting Rule, 77 FR at 

1183. 

392 7 U.S.C. 6s(i). 

393See also Final Confirmation Rules, 77 FR 

55904. 

394 In addition, the Commission notes that 

regulation 23.504(b)(2) requires that the swap 

trading relationship documentation of swap dealers 

and MSPs must include all confirmations of swap 

transactions. 

395See Final Swap Dealer and MSP 

Recordkeeping Rule, 77 FR 20128. 

396See 7 U.S.C. 6s(h). See also External Business 

Conduct Rules, 77 FR at 9822–9829. 

397See note 351, supra. 

post-execution risk management tool to 

ensure accurate confirmation of a 

swap’s terms and to identify and resolve 

any discrepancies between 

counterparties regarding the valuation 

of the swap. Portfolio compression is a 

post-trade processing and netting 

mechanism that is intended to ensure 

timely, accurate processing and netting 

of swaps.386 Regulation 23.503 requires 

all swap dealers and MSPs to establish 

policies and procedures for terminating 

fully offsetting uncleared swaps, when 

appropriate, and periodically 

participating in bilateral and/or 

multilateral portfolio compression 

exercises for uncleared swaps with 

other swap dealers or MSPs or 

conducted by a third party.387 The rule 

also requires policies and procedures for 

engaging in such exercises for uncleared 

swaps with non-swap dealers and nonMSPs upon request. Further, 

participation in multilateral portfolio 

compression exercises is mandatory for 

dealer-to-dealer trades. 

vi. Real-Time Public Reporting 

Section 2(a)(13) of the CEA directs the 

Commission to promulgate rules 

providing for the public availability of 

swap transaction and pricing data on a 

real-time basis.388 In accordance with 

this mandate, the Commission 

promulgated part 43, which provides 

that all ‘‘publicly reportable swap 

transactions’’ must be reported and 

publicly disseminated, and which 

establishes the method, manner, timing 

and particular transaction and pricing 

data that must be reported by parties to 

a swap transaction.389 Additionally, the 

Commission adopted regulation 23.205, 

which directs swap dealers and MSPs to 

undertake such reporting and to have 

the electronic systems and procedures 

necessary to transmit electronically all 

information and data required to be 

reported in accordance with part 43.390

The real-time dissemination of swap 

transaction and pricing data supports 

the fairness and efficiency of markets 

and increases transparency, which in 

turn improves price discovery and 

decreases risk (e.g., liquidity risk).391

vii. Trade Confirmation 

Section 4s(i) of the CEA 392 requires 

that each swap dealer and MSP must 

comply with the Commission’s 

regulations prescribing timely and 

accurate confirmation of swaps. The 

Commission has adopted regulation 

23.501, which requires, among other 

things, a timely and accurate 

confirmation of swap transactions 

(which includes execution, termination, 

assignment, novation, exchange, 

transfer, amendment, conveyance, or 

extinguishing of rights or obligations of 

a swap) among swap dealers and MSPs 

by the end of the first business day 

following the day of execution.393

Timely and accurate confirmation of 

swaps—together with portfolio 

reconciliation and compression—are 

important post-trade processing 

mechanisms for reducing risks and 

improving operational efficiency.394

viii. Daily Trading Records 

Pursuant to CEA section 4s(g), the 

Commission adopted regulation 23.202, 

which requires swap dealers and MSPs 

to maintain daily trading records, 

including records of trade information 

related to pre-execution, execution, and 

post-execution data that is needed to 

conduct a comprehensive and accurate 

trade reconstruction for each swap. The 

final rule also requires that records be 

kept of cash or forward transactions 

used to hedge, mitigate the risk of, or 

offset any swap held by the swap dealer 

or MSP.395 Accurate and timely 

recordkeeping regarding all phases of a 

swap transaction can serve to greatly 

enhance a firm’s internal supervision, as 

well as the Commission’s ability to 

detect and address market or regulatory 

abuses or evasion. 

b. Category B: External Business 

Conduct Standards 

Pursuant to CEA section 4s(h), the 

Commission has adopted external 

business conduct rules, which establish 

business conduct standards governing 

the conduct of swap dealers and MSPs 

in dealing with their counterparties in 

entering into swaps.396 Broadly 

speaking, these rules are designed to 

enhance counterparty protection by 

significantly expanding the obligations 

of swap dealers and MSPs towards their 

counterparties. Under these rules, swap 

dealers and MSPs will be required, 

among other things, to conduct due 

diligence on their counterparties to 

verify eligibility to trade, provide 

disclosure of material information about 

the swap to their counterparties, 

provide a daily mid-market mark for 

uncleared swaps and, when 

recommending a swap to a 

counterparty, make a determination as 

to the suitability of the swap for the 

counterparty based on reasonable 

diligence concerning the counterparty. 

E. Categorization of Entity-Level and 

Transaction-Level Requirements 

As noted above, even before the 

Commission published the Proposed 

Guidance, a number of commenters 

recommended that the Commission, in 

interpreting the cross-border 

applicability of the Dodd-Frank Act 

swaps provisions, should distinguish 

between requirements that apply at an 

entity level (i.e., to the firm as a whole) 

as compared to those that apply at a 

transactional level (i.e., to the 

individual swap transaction or trading 

relationship).397 The Commission agrees 

with such commenters, and generally 

expects that it may apply its policies 

differently depending on the category 

(Entity-Level or Transaction-Level) or 

sub-category (First or Second Category 

of Entity-Level Requirements or 

Category A or B of the Transaction-Level 

Requirements) into which such 

requirement falls, subject to its further 

consideration of all of the relevant facts 

and circumstances. 

After giving further consideration to 

the categorization in the Proposed 

Guidance, including comments received 

in this area, this Guidance makes a few 

minor modifications to the proposed 

categorization of Entity-Level and 

Transaction-Level Requirements, as 

described below. 

1. Categorization Under the Proposed 

Guidance 

The Proposed Guidance separated the 

Entity-Level Requirements into two 

subcategories. The first included capital 

adequacy, chief compliance officer, risk 

management, and swap data 

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398See, e.g., SocGen (Aug. 8, 2012) at 6; IIB (Aug. 

27, 2012) at 2; Clearing House (Aug. 27, 2012) at 

22. 

399See, e.g., SIFMA (Aug. 27, 2012) at A4, A34, 

A35; Credit Suisse (Aug. 27, 2012) at 10; 

Association for Financial Markets in Europe 

(AFME) (Aug. 24, 2012) at 8–9. 

400Credit Suisse (Aug. 27, 2012) at 10. 

401 ISDA (Aug. 27, 2012) at 11. Similarly, 

Australian Bankers stated that the real-time public 

reporting and trade execution requirements should 

be treated in the same manner as the external 

business conduct standards and have no 

application to transactions involving a non-U.S. 

swap dealer and its non-U.S. counterparties. 

Australian Bankers (Aug. 27, 2012) at 5. See also 

SIFMA (Aug. 27, 2012) at A37 (stating that real-time 

public reporting should be treated in the same way 

as external business conduct standards and, in 

particular, should not apply to non-U.S. swap 

entities or non-U.S. branches for transactions with 

non-U.S. persons). 

402See also The Clearing House (Aug. 27, 2012) 

at 22 (stating that no pre- or post-trade transparency 

rules or conflict of interest rules should apply to 

transactions with non-U.S. counterparties. These 

rules should be treated similarly to the external 

business conduct rules—excluded from the 

Transaction-Level and Entity-Level categories, and 

not applied at all to transactions between a nonU.S. entity (including a non-U.S. branch of a U.S. 

entity) and its non-U.S. counterparty, regardless of 

whether that counterparty is guaranteed by, or a 

conduit for, a U.S. person). 

403 IIB (Aug. 27, 2012) at 17, 32–33. IIB further 

stated that application of these pre- and post-trade 

requirements to swaps between non-U.S. persons 

outside the United States would raise ‘‘serious, 

unprecedented’’ concerns relating to the 

sovereignty of foreign markets. IIB (Aug. 27, 2012) 

at 34. 

404Letter from Sen. Levin at 11–12. 

405 Id. 

406Sumitomo (Aug. 24, 2012) at 3. 

407 IATP (Aug. 27, 2012) at 7. 

408Letter from Sen. Levin at 11–12. 

409 Id. 

recordkeeping, all of which relate to 

risks to a firm as a whole. The second 

proposed subcategory included SDR 

Reporting and Large Trader Reporting, 

which relate directly to the 

Commission’s market oversight. 

The Proposed Guidance separated the 

Transaction-Level Requirements into 

two subcategories, ‘‘Category A’’ and 

‘‘Category B.’’ The ‘‘Category A’’ 

Transaction-Level Requirements relate 

to risk mitigation and transparency: (1) 

Clearing and swap processing; (2) 

margining and segregation for uncleared 

swaps; (3) trade execution; (4) swap 

trading relationship documentation; (5) 

portfolio reconciliation and 

compression; (6) real-time public 

reporting; (7) trade confirmation; and (8) 

daily trading records. 

The ‘‘Category B’’ Transaction-Level 

Requirements—the external business 

conduct standards—are those 

requirements that may not be necessary 

to apply to swaps between non-U.S. 

persons taking place outside the United 

States. With respect to these swaps, the 

Commission believes that foreign 

regulators may have a relatively stronger 

supervisory interest in regulating sales 

practices concerns than the 

Commission. 

2. Comments 

Commenters generally supported the 

division of Dodd-Frank’s swaps 

provisions (and Commission regulations 

thereunder) into Entity-Level and 

Transaction-Level Requirements.398

Certain of these commenters, however, 

made specific recommendations for 

reclassification of some of these 

Requirements. 

a. Reporting and Trade-Execution 

Requirements 

With regard to reporting and tradeexecution requirements, a number of 

commenters argued that all forms of 

swaps reporting, including SDR 

Reporting and Large Trader Reporting, 

should be treated as Transaction-Level 

Requirements and thereby could be 

eligible for substituted compliance for 

certain transactions with non-U.S. 

counterparties.399 In their view, SDR 

Reporting—like real-time public 

reporting—is implemented on a swapby-swap basis and more closely linked 

to market transparency than risk 

mitigation. Credit Suisse noted that the 

Commission’s bifurcated approach to 

SDR Reporting and real-time public 

reporting creates unnecessary 

complications. It argued that both sets of 

reporting requirements should apply to 

a non-U.S. swap dealer only when 

dealing with U.S. persons (excluding 

foreign branches of U.S. swap 

dealers).400

ISDA believed that real-time public 

reporting and trade execution should be 

treated like the external business 

conduct rules. It argued that these rules 

relate to pre-trade price discovery and 

market structure and client 

protections.401 Similarly, J.P. Morgan 

commented that the real-time public 

reporting and trade execution 

requirements should not apply to 

transactions between non-U.S. swap 

dealers or non-U.S. MSPs and non-U.S. 

counterparties, arguing that these 

requirements do not reduce market risk 

but rather promote price competition.402

IIB stated that the Commission should 

treat mandatory trade execution, realtime public reporting and daily trading 

records as ‘‘Category B’’ TransactionLevel Requirements, since these 

requirements are intended to give 

customers enhanced access to the best 

pricing and affect not only individual 

counterparties but the overall market.403

On the other hand, Senator Levin 

stated that reporting and trade execution 

requirements should be applied broadly 

to all swaps of non-U.S. swap dealers 

and non-U.S. MSPs that are affiliates of 

U.S. financial institutions, so as to 

provide transparency regarding their 

swap activities and to protect the U.S. 

financial system.404 He stated that 

standard trade execution helps to ensure 

that complex swaps are properly 

booked, and reporting discourages 

‘‘below-the-radar’’ transactions 

involving complex swaps.405

b. Swap Trading Relationship 

Documentation, Portfolio Reconciliation 

and Compression, Daily Trading 

Records and External Business Conduct 

Standards 

Sumitomo stated that certain 

Transaction-Level Requirements, 

including swap trading relationship 

documentation, portfolio reconciliation 

and compression, daily trading records, 

and external business conduct 

standards, should instead be classified 

as Entity-Level Requirements. It 

contended that these are not logically 

linked to particular transactions and 

would be required to be conducted on 

a daily basis per counterparty.406 IATP 

stated that portfolio compression and 

reconciliation requirements are critical 

to a firm’s central risk mitigation 

functions and therefore should be 

classified as Entity-Level Requirements. 

This commenter also argued that 

margin, segregation and other 

requirements for swaps that are so 

designated by non-U.S. affiliates of U.S. 

persons as to be unclearable should be 

regulated under the Entity-Level 

Requirements.407

Similarly, Senator Levin stated that 

clearing, margin and portfolio 

reconciliation and compression 

requirements and external business 

conduct standards should be applied to 

all swaps of non-U.S. swap dealers and 

non-U.S. MSPs that are affiliates of U.S. 

financial institutions.408 In the Senator’s 

view, margin requirements are critical 

safeguards against rapidly increasing 

losses, portfolio reconciliation and 

compression procedures help to 

maintain an accurate understanding of 

the size and nature of a firm’s swaps 

positions, and external business 

conduct standards encourage integrity 

in the swaps markets.409 Societe 

Generale also stated that rules relating 

to confirmation processing and portfolio 

reconciliation and compression should 

be categorized as Entity-Level 

Requirements, explaining that these all 

relate to the functioning of a swap 

dealer’s ‘‘back office’’ operations and are 

tied to its trading systems. As a result, 

implementing confirmation rules, for 

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410SocGen (Aug. 8, 2012) at 6 (stating that banks 

with a centralized booking model will face 

technological difficulties in applying confirmation 

processing and portfolio reconciliation and 

compression rules only with respect to U.S. 

persons, and that a requirement to apply these rules 

to all customers (even non-U.S. persons) is 

inconsistent with international comity). See also 

Australian Bankers (Aug. 27, 2012) at 5 (stating that 

portfolio reconciliation and compression 

requirements should be categorized as Entity-Level 

Requirements, as they are critical to risk mitigation 

and back-office functions). 

411 IIB (Aug. 27, 2012) at 32–33. 

412 IIB (Aug. 27, 2012) at 32. This would render 

internal conflicts of interest requirements 

applicable only in connection with personnel of its 

research department or clearing unit preparing 

research reports for use with, or providing clearing 

services to, respectively, U.S. persons. 

413SIFMA (Aug. 27, 2012) at A35–36. 

414By way of illustration, consistent with the 

purpose of the capital requirement, which is 

intended to reduce the likelihood and cost of a 

swap dealer’s default by requiring a financial 

cushion, a swap dealer’s or MSP’s capital 

requirements would be set on the basis of its overall 

portfolio of assets and liabilities. 

example, for swaps with U.S. persons 

only is ‘‘extremely difficult from a 

technological standpoint.’’ 410

IIB recommended that the daily 

trading records requirements 

(Commission regulation 23.202) be 

categorized as a Category B TransactionLevel Requirement. It reasoned that this 

rule is most relevant when a non-U.S. 

swap dealer or non-U.S. MSP is trading 

with a U.S. person to whom it owes U.S. 

sales practice obligations and for whom 

the Commission’s interest in addressing 

market abuses is highest. It also noted 

that the obligation to make and retain 

records of pre-execution oral 

conversations, a principal element of 

the rule, is most likely to give rise to 

conflicts with foreign privacy laws.411

c. Internal Conflicts of Interest 

Requirement 

IIB noted that the internal conflicts of 

interest requirement (Commission 

regulation 23.605) is categorized as an 

Entity-Level Requirement in the 

Proposed Guidance. It stated that 

internal research conflicts of interest 

procedures are intended to promote the 

integrity of research reports to 

customers, and that internal clearing 

conflicts of interest procedures are 

intended to promote client access to 

better pricing on execution and clearing. 

As a result, IIB views the Commission’s 

interest in applying these requirements 

to non-U.S. clients as minimal and 

recommends that the internal conflicts 

of interest requirement be categorized as 

a new ‘‘Category B’’ Entity-Level 

Requirement.412

d. Position Limits and AntiManipulation Rules 

SIFMA stated that position limits and 

anti-manipulation rules, which were not 

addressed in the Proposed Guidance, 

should be categorized as TransactionLevel Requirements and, therefore, be 

eligible for relief in some circumstances. 

They argued that these rules have a 

close nexus to market transparency, as 

opposed to risk mitigation of a firm’s 

failure.413

3. Commission Guidance 

In general, the Commission would 

apply the Dodd-Frank provisions 

differently depending on the category 

(Entity-Level or Transaction-Level) or 

sub-category (First or Second Category 

of Entity-Level Requirements or 

Category A or B of the Transaction-Level 

Requirements) into which such 

requirement falls. Therefore, the 

Commission has carefully reviewed 

comments on the classification of the 

Entity-Level Requirements and 

Transaction-Level Requirements, as well 

as comments regarding whether and 

how Entity-Level and Transaction-Level 

Requirements should apply to swaps 

between various types of counterparties, 

and under what circumstances the 

Commission’s policy should 

contemplate that various swaps should 

generally be eligible for substituted 

compliance, or provide that certain of 

the Commission’s requirements would 

generally not apply. 

After careful consideration, the 

Commission would generally treat 

swaps requirements as Entity-Level 

Requirements and Transaction-Level 

Requirements largely in accordance 

with the Proposed Guidance, with 

certain minor modifications described 

below. 

a. Entity-Level Requirements 

Consistent with CEA section 2(i), the 

Commission would treat the following 

requirements as Entity-Level 

Requirements, as proposed: Capital 

adequacy, chief compliance officer, risk 

management, swap data recordkeeping, 

SDR Reporting, and Large Trader 

Reporting. 

At the core of a robust internal risk 

controls system is the firm’s capital— 

and particularly, how the firm identifies 

and manages its risk exposure arising 

from its portfolio of activities.414

Equally foundational to the financial 

integrity of a firm is an effective internal 

risk management process, which must 

be comprehensive in scope and reliant 

on timely and accurate data regarding 

its swap activities. To be effective, such 

a system must have a strong and 

independent compliance function. 

These internal controls-related 

requirements—namely, the 

requirements related to chief 

compliance officer, risk management, 

swap data recordkeeping—are designed 

to serve that end. Given their functions, 

the Commission’s policy is that these 

requirements should be applied on a 

firm-wide basis to effectively address 

risks to the swap dealer or MSP as a 

whole, and should be classified as 

Entity-Level Requirements. 

SDR Reporting and Large Trader 

Reporting relate more closely to market 

transparency and to the Commission’s 

market surveillance program. Among 

other things, data reported to SDRs will 

enhance the Commission’s 

understanding of concentrations of risks 

within the market, as well as promote a 

more effective monitoring of risk 

profiles of market participants in the 

swaps market. Large Trader Reporting, 

along with an analogous reporting 

system for futures contracts, is essential 

to the Commission’s ability to conduct 

effective surveillance of markets in U.S. 

physical commodity futures and 

economically equivalent swaps. Given 

the functions of these reporting 

requirements, the Commission’s view is 

that each requirement generally should 

be applied across swaps, irrespective of 

the counterparty or the location of the 

swap, in order to ensure that the 

Commission has a comprehensive and 

accurate picture of market activities. 

Otherwise, the intended value of these 

requirements would be significantly 

compromised, if not undermined. 

Therefore, the Commission’s policy is to 

generally treat SDR Reporting and Large 

Trader Reporting as Entity-Level 

Requirements. 

The Commission did not address in 

the Proposed Guidance whether 

position limits and anti-manipulation 

provisions should fall in the EntityLevel or Transaction-Level 

Requirements category. It is the 

Commission’s view that these 

provisions relate more to market 

integrity, as opposed to the financial 

integrity of a firm, and it is essential that 

they apply regardless of the 

counterparty’s status (U.S. person or 

not) in order to fully achieve the 

underlying purpose of these respective 

provisions. Accordingly, these 

requirements are outside the scope of 

this Guidance. However, the monitoring 

of position limits under Commission 

regulation 23.601 is included in the 

Entity-Level Requirements under this 

Guidance. 

After considering the input of market 

participants and others through the 

comment process, and giving further 

consideration to how the language in 

CEA section 2(i) should be interpreted 

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415 In addition, as noted in section G below, 

reflecting its interpretation of CEA section 2(i), the 

Commission generally contemplates that U.S. swap 

dealers and MSPs would comply in full with the 

Entity-Level Requirements (regardless of whether 

the Entity-Level Requirements are classified as 

being in the First Category or Second Category), 

without substituted compliance available. This 

interpretation also applies to swaps with U.S. swap 

dealers or U.S. MSPs that are affiliates of non-U.S. 

persons. 

416As explained in section G below, the 

Commission’s policy is that where a swap dealer or 

MSP is a U.S. person, all of the entity-level 

requirements would generally apply in full (without 

substituted compliance available), regardless of the 

type of counterparty. 

417See section G, infra, for additional information 

on the application of the Entity-Level 

Requirements. 

Level Requirements and permitting 

substituted compliance, the 

Commission’s policy is to treat the 

Entity-Level Requirements in 

subcategories largely as proposed. 

As explained above, Entity-Level 

Requirements ensure that registered 

swap dealers and MSPs implement and 

maintain a comprehensive and robust 

system of internal controls to ensure the 

financial integrity of the firm, and in 

turn, the protection of the financial 

system. In this respect, the Commission 

has strong supervisory interests in 

applying the same rigorous standards, or 

comparable and comprehensive 

standards, to non-U.S. swap dealers and 

non-U.S. MSPs whose swap activities or 

positions are substantial enough to 

require registration under the CEA. 

Requiring such swap dealers and MSPs 

to rigorously monitor and address the 

risks they incur as part of their day-today businesses would lower the 

registrants’ risk of default—and 

ultimately protect the public and the 

financial system. 

Therefore, the Commission 

contemplates that non-U.S. swap 

dealers and non-U.S. MSPs will comply 

with all of the First Category of EntityLevel Requirements. In addition, 

consistent with principles of 

international comity, substituted 

compliance may be available for these 

Entity-Level Requirements in certain 

circumstances, as explained further 

below. In contrast, with regard to EntityLevel Requirements in the Second 

Category, substituted compliance 

should generally be available only 

where the counterparty is a non-U.S. 

person.415

i. The First Category—Capital 

Adequacy, Chief Compliance Officer, 

Risk Management, and Swap Data 

Recordkeeping (Except for Certain 

Recordkeeping Requirements) 

The Commission’s policy generally is 

to treat the requirements related to 

capital adequacy, chief compliance 

officer, risk management, and swap data 

recordkeeping (except swap data 

recordkeeping relating to complaints 

and marketing and sales materials under 

Commission regulations 23.201(b)(3) 

and 23.201(b)(4), respectively) in the 

First Category. These requirements 

address and manage risks that arise from 

a firm’s operation as a swap dealer or 

MSP. Collectively, they constitute a 

firm’s first line of defense against 

financial, operational, and compliance 

risks that could lead to a firm’s default. 

The First Category is identical to the 

first subcategory proposed by the 

Commission in the Proposed Guidance, 

except that the Commission’s policy is 

to treat swap data recordkeeping under 

part 43 and part 46 of the Commission’s 

regulations and swap data 

recordkeeping related to complaints and 

marketing and sales materials under 

Commission regulations 23.201(b)(3) 

and 23.201(b)(4) as part of the ‘‘Second 

Category’’ of Entity-Level Requirements. 

As noted above, for Entity-Level 

Requirements in the First Category, 

substituted compliance generally would 

be available for a non-U.S. swap dealer 

or non-U.S. MSP (including one that is 

an affiliate of a U.S. person) regardless 

of whether the counterparty is a U.S. 

person or a non-U.S. person.416 In 

contrast, for Entity-Level Requirements 

in the Second Category, substituted 

compliance generally would be 

available for a non-U.S. swap dealer or 

MSP only where the counterparty is a 

non-U.S. person. 

ii. The Second Category—SDR 

Reporting, Certain Swap Data 

Recordkeeping Requirements and Large 

Trader Reporting 

The Commission’s policy retains SDR 

Reporting in the Second Category, as 

proposed. SDR Reporting furthers the 

goals of the Dodd-Frank Act to reduce 

systemic risk, increase transparency and 

promote market integrity. Specifically, 

data reported to SDRs under the SDR 

Reporting rules provide the Commission 

with information necessary to better 

understand and monitor concentrations 

of risk, as well as risk profiles of 

individual market participants for 

cleared and uncleared swaps. 

The Commission believes that 

retaining SDR Reporting in the Second 

Category would be appropriate. 

Consistent with section 2(i), the 

Commission’s policy is that U.S. swap 

dealers or MSPs (including those that 

are affiliates of a non-U.S. person) 

generally should comply in full with all 

of the Entity-Level Requirements, 

including SDR Reporting. Further, nonU.S. swap dealers and non-U.S. MSPs 

(including those that are affiliates of a 

U.S. person), generally should comply 

with SDR Reporting, and substituted 

compliance should be available (to the 

extent applicable) only where the swap 

counterparty is a non-U.S. person, 

provided that the Commission has 

direct access (including electronic 

access) to the relevant swap data that is 

stored at the foreign trade repository.417

The Commission contemplates 

treating swap data recordkeeping related 

to complaints and marketing and sales 

materials under Commission regulations 

23.201(b)(3) and 23.201(b)(4) as part of 

the ‘‘Second Category’’ because, in the 

Commission’s view, non-U.S. swap 

dealers and non-U.S. MSPs (including 

those that are affiliates of a U.S. person) 

generally should comply with SDR 

Reporting. Further, substituted 

compliance should be available for nonU.S. swap dealers or MSPs, to the extent 

applicable, only where the swap 

counterparty is a non-U.S. person. 

Large Trader Reporting furthers the 

goals of the Dodd-Frank Act to reduce 

systemic risk, increase transparency and 

promote market integrity. Large Trader 

Reporting, in conjunction with the 

Commission’s large trader reporting 

system for futures contracts, is essential 

to the Commission’s ability to conduct 

effective surveillance of markets in U.S. 

physical commodity futures and 

economically equivalent swaps. Given 

the regulatory function of Large Trader 

Reporting, the Commission’s policy is to 

apply these requirements to non-U.S. 

persons whose trading falls within its 

scope to the same extent as U.S. 

persons. Accordingly, as discussed 

further in section G below, the 

Commission would not recognize 

substituted compliance in place of 

compliance with Large Trader 

Reporting. 

b. Transaction-Level Requirements 

As previously noted, whether a 

particular Dodd-Frank Act requirement 

should apply on a transaction-bytransaction basis in the context of crossborder activity for purposes of section 

2(i) of the CEA requires the exercise of 

some degree of judgment. Nevertheless, 

bearing in mind principles of 

international comity, the Commission 

anticipates that, in general, the 

Transaction-Level Requirements may be 

applied on a transaction-by-transaction 

basis. 

The Commission’s policy 

contemplates treating as TransactionLevel Requirements all of the 

requirements that the Commission 

proposed to include. Thus, the 

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418Substituted compliance is discussed in section 

F, infra. The application of the Category A 

Transaction-Level Requirements and eligibility for 

substituted compliance is discussed in section 

IV.G.4. The application of the Category B 

Transaction-Level Requirements is discussed in 

section IV.G.5. The application of certain CEA 

provisions and certain Entity and Transaction-Level 

Requirements to non-registrants is discussed in 

section IV.H. 

419See generally Final Real-Time Reporting Rule, 

77 FR at 1250–1266; Swap Data Recordkeeping and 

Reporting Requirements, 77 FR 2136, 2210–2224 

(Jan. 13, 2012) (‘‘Final Data Rules’’). Part 43 applies 

to reports of swap transaction and pricing data to 

a registered SDR, in order that the SDR can publicly 

disseminate such data pursuant to part 43 and 

Appendix A to part 43 as soon as technologically 

practicable after execution of the publicly 

reportable swap. Final Real-Time Reporting Rule, 

77 FR 1249. Under part 45, counterparties report 

creation data for the swap—including all primary 

economic terms (‘‘PET’’) data and confirmation 

data—as well as continuation data also as soon as 

technologically practicable. See Final Data Rules, 

77 FR at 2149–2151, 2199–2202. 

420See Final Real-Time Reporting Rule, 77 FR 

1237 (Jan. 9, 2012) (noting that ‘‘ . . . coordination 

is expected to reduce costs by allowing reporting 

parties, SEFs and DCMs to send one set of data to 

an SDR for the purpose of satisfying the 

requirements of both rules.’’); id. at 1210 (noting 

that ’’ . . . although reporting parties may use the 

same data stream for reporting regulatory data and 

real-time data, Commission regulation 43.4(d)(2) 

clarifies the intent of the Proposing Release: The 

reporting requirements for SEFs, DCMs and 

reporting parties for real-time public reporting 

purposes are separate from the requirement to 

report to an SDR for regulatory reporting 

purposes.’’). 

421Final Data Rules, 77 FR 2150, 2182. If SDR 

Reporting and real-time public reporting do not 

both apply to a swap transaction, market 

participants that have connected to registered SDRs 

and employed single stream reporting infrastructure 

and systems may be required to change such 

systems to bifurcate the part 43 and part 45 data 

sets, which are generated and transmitted in a 

single report. The Commission understands that 

such bifurcation could occur due to the manner 

with which Transaction-Level and Entity-Level 

requirements apply to the particular swap 

transaction. 

422Real-Time Public Reporting of Swap 

Transaction Data, 77 FR 1217. See also Final Data 

Rules, 77 FR at 2182. 

Transaction-Level Requirements are: (1) 

Required clearing and swap processing; 

(2) margining and segregation for 

uncleared swaps; (3) trade execution; (4) 

swap trading relationship 

documentation; (5) portfolio 

reconciliation and compression; (6) realtime public reporting; (7) trade 

confirmation; (8) daily trading records; 

and (9) external business conduct 

standards. 

The Commission contemplates 

treating the Transaction-Level 

Requirements in two subcategories, 

designated as Category A and Category 

B, largely as proposed. Generally, these 

categories reflect how the Commission 

generally contemplates applying various 

Transaction-Level Requirements to 

various types of counterparties, and in 

guiding the consideration of when 

substituted compliance will be available 

under this Guidance.418

i. The Category A Transaction-Level 

Requirements 

The ‘‘Category A’’ Transaction-Level 

Requirements relate to risk mitigation 

and transparency, and included the first 

eight Transaction-Level requirements 

referenced above. 

The Commission does not believe it 

would be appropriate to treat, as 

suggested by commenters, swap trading 

relationship documentation, portfolio 

reconciliation and compression, daily 

trading records and external business 

conduct standards as Entity-Level 

Requirements. The Commission 

recognizes that firms may find a certain 

degree of operational efficiency in 

applying these requirements on a firmwide basis. On the other hand, the 

Commission expects that treatment of 

these as Transaction-Level 

Requirements should allow for greater 

flexibility in terms of whether and how 

Dodd-Frank requirements apply. For 

example, under the Proposed Guidance, 

the Commission would not interpret 

section 2(i) generally to apply the DoddFrank’s clearing requirement to a swap 

between a non-U.S. swap dealer and a 

non-U.S. counterparty. In the 

Commission’s judgment, allowing swap 

trading relationship documentation, 

portfolio reconciliation and 

compression and external business 

conduct standards to be applied on a 

transaction basis would not undermine 

the underlying regulatory objectives 

and, yet, will give due recognition to the 

home jurisdiction’s supervisory interest. 

Consistent with this rationale, the 

Commission would treat margin, 

segregation, and related requirements as 

Transaction-Level Requirements. 

The Commission also is retaining the 

trade execution requirement, as 

proposed, in Category A. The trade 

execution requirement is intended to 

bring the trading of mandatorily cleared 

swaps that are made available to trade 

onto regulated exchanges or execution 

facilities. By requiring the trades of 

mandatorily cleared swaps that are 

made available to trade to be executed 

on an exchange or an execution 

facility—each with its attendant preand post-trade transparency and 

safeguards to ensure market integrity— 

the trade execution requirement furthers 

the statutory goals of promoting 

financial stability, market efficiency and 

enhanced transparency. 

The Commission’s policy will treat 

real-time public reporting as a 

Transaction-Level Requirement. 

However, for the reasons discussed 

below, the Commission clarifies that it 

does not intend that its policy would 

preclude a market participant from 

applying real-time public reporting with 

respect to swap transactions that are not 

necessarily subject to this TransactionLevel Requirement if doing so would be 

more efficient for the market 

participant. 

Part 43 of the Commission’s 

regulations and part 45 of the 

Commission’s regulations, respectively, 

prescribe the data fields that are to be 

included in real-time public reporting 

and SDR Reporting reports with respect 

to a reportable swap transaction.419

The Commission understands from 

commenters that in certain 

circumstances, reporting part 43 and 

part 45 data for the same swap 

transaction in separate reports (‘‘two 

stream reporting’’) could accommodate 

market participants that have a 

transactional structure and/or systems 

that are designed or suited to send 

separate submissions.420 However, the 

Commission also recognizes that in 

other circumstances, permitting market 

participants to include part 43 and part 

45 data for the same swap transaction in 

a single report (‘‘single stream 

reporting’’) could optimize efficiency.421

The Commission anticipated that 

reporting parties might elect to use one 

data reporting stream for both SDR 

Reporting and real-time public reporting 

under part 45 and part 43 respectively, 

to reduce costs and optimize efficiency, 

and many market participants have 

chosen to build and integrate single 

stream reporting systems.422 The 

Commission is aware that, as 

commenters have stated, categorizing 

SDR Reporting under part 45 as an 

Entity-Level requirement and real-time 

public reporting under part 43 as a 

Transaction-Level requirement could, in 

certain circumstances, negate the 

benefits of single stream reporting, and 

could present challenges to market 

participants who have built single 

stream reporting infrastructure. 

In view of these concerns, the 

Commission would, in general, treat 

real-time public reporting as a 

Transaction-Level Requirement. 

However, the Commission does not 

intend that its policy would preclude a 

market participant from applying realtime public reporting with respect to 

swap transactions that are not 

necessarily subject to this TransactionLevel Requirement if, for example, this 

would allow the market participant to 

realize efficiency gains from single 

stream reporting or otherwise as 

discussed above. 

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45340 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

423The application of the Category B TransactionLevel Requirements to swap dealers and MSPs is 

discussed in section IV.G.5. 

424See, e.g., SIFMA, (Aug. 27, 2012) at 3, A46; 

State Street (Aug. 27, 2012) at 3; Global Financial 

Markets Association (‘‘GFMA’’) (Aug. 27, 2012) at 

2; Association for Financial Markets in Europe 

(‘‘AFME’’) (Aug. 27, 2012) at 2; J.P. Morgan (Aug. 

13, 2012) at 5; Australian Bankers (Aug. 27, 2012) 

at 2; Japanese Bankers Association (Aug. 27, 2012) 

at 3; Comissao de Valores Mobiliarios (‘‘CVM’’) 

(Aug. 27, 2012) at 2. 

425See, e.g., FSR (Aug. 27, 2012) at 6–7. 

426See IATP (Aug. 27, 2012) at 11–12; IIAC (Aug. 

27, 2012) at 2, 9–11. 

427See IATP (Aug. 27, 2012) at 11–12. 

428See, e.g., ICI (Aug. 23, 2012) at 7–11; Capital 

Markets (Aug. 24, 2012) at 5–6. 

429See Deutsche Bank, Aug. 27, 2012 at 5–6; 

Lloyds (Aug. 24, 2012) at 2. 

430See Australian Securities and Investments 

Commission; Hong Kong Monetary Authority; 

Monetary Authority of Singapore; Reserve Bank of 

Australia; Securities and Futures Commission, 

Hong Kong (Aug. 27, 2012) at 3–4. 

431See CEWG (Aug. 27, 2012) at 7; CVM (Aug. 27, 

2012) at 2; ICI (Aug. 23, 2012) at 9; IIB (Aug. 27, 

2012) at 38–39; Hong Kong Banks (Aug. 27, 2012) 

at 2, 10, 14, 15; Korea Federation of Banks (‘‘Korea 

Banks’’) (Aug. 27, 2012) at 2–3; The Clearing House 

(Aug. 27, 2012) at 3–4, 31–35. 

ii. The Category B Transaction-Level 

Requirements (External Business 

Conduct Standards) 

As proposed, the Commission’s policy 

will treat external business conduct 

standards as a ‘‘Category B’’ 

Transaction-Level Requirement for 

purposes of the general application of 

this Transaction-Level Requirement to 

various categories of swap 

counterparties.423 External business 

conduct standards are oriented toward 

customer-protection. Among other 

obligations, the external business 

conduct rules generally require 

registrants to conduct due diligence on 

their counterparties to verify eligibility 

to trade (including eligible contract 

participant status), refrain from 

engaging in abusive market practices, 

provide disclosure of material 

information about the swap to their 

counterparties, provide a daily midmarket mark for uncleared swaps and, 

when recommending a swap to a 

counterparty, make a determination as 

to the suitability of the swap for the 

counterparty based on reasonable 

diligence concerning the counterparty. 

In the Commission’s view, such rules 

have an attenuated link to, and are 

distinguishable from, market-oriented 

protections such as the trade execution 

mandate. Additionally, the Commission 

believes that the foreign jurisdictions in 

which non-U.S. persons are located are 

likely to have a significant interest in 

the type of business conduct standards 

that would be applicable to transactions 

with such non-U.S. persons within their 

jurisdiction. Because the Commission 

believes that foreign regulators may 

have a relatively stronger supervisory 

interest in regulating sales practices 

concerns related to swaps between nonU.S. persons taking place outside the 

United States than the Commission, the 

Commission believes that generally it is 

appropriate that the business conducts 

standards of the home jurisdiction, 

rather than those established by the 

Commission, apply to such transactions 

between non-U.S. persons. 

After reviewing the comments on 

internal conflicts of interest procedures, 

the Commission has given consideration 

to whether to treat internal conflicts of 

interest rules relating to clearing under 

Commission regulation 23.605 under 

Category B of the Transaction-Level 

Requirements. The Commission 

considered the view of commenters that 

stated that this particular requirement is 

generally more akin to the external 

business conduct standards and, as 

such, can reasonably be expected to be 

narrowly targeted to apply only with 

respect to U.S. clients, without 

undermining the regulatory benefits 

associated with the rule. However, 

because the Commission believes that 

internal conflicts of interest related to 

clearing should be applied on a firmwide basis, the Commission’s policy is 

that this requirement generally should 

be treated as an Entity-Level 

Requirement as proposed. 

The Commission also has considered 

whether internal conflicts of interest 

procedures relating to research should 

be treated as Entity-Level Requirements 

as proposed. These informational and 

supervisory firewalls are designed to 

ensure that research reports are free 

from undue influence by the firm’s 

trading personnel. As a practical matter, 

it is generally difficult, if not 

impossible, to establish and maintain 

such safeguards on a transaction or 

client basis. Because the Commission 

believes that these firewalls, in order to 

achieve their regulatory purpose, should 

be applied on a firm-wide basis, the 

Commission’s policy is that internal 

conflicts of interest procedures relating 

to research generally should be treated 

as Entity-Level Requirements. 

F. Substituted Compliance 

1. Proposed Guidance 

In the Proposed Guidance, the 

Commission stated that a cross-border 

policy that allows for flexibility in the 

application of the CEA while ensuring 

the high level of regulation 

contemplated by the Dodd-Frank Act 

and avoiding potential conflicts 

between U.S. regulations and foreign 

law is consistent with principles of 

international comity. To that end, the 

Commission set forth a general 

framework for substituted compliance. 

Under this ‘‘substituted compliance’’ 

regime, the Commission may determine 

that certain laws and regulations of a 

foreign jurisdiction are comparable to 

and as comprehensive as a 

corresponding category of U.S. laws and 

regulations. If the Commission makes 

such a determination, then an entity or 

transaction in that foreign jurisdiction 

that is subject to the category of U.S. 

laws and regulations for which 

comparability is determined will be 

deemed to be in compliance therewith 

if that entity or transaction complies 

with the corresponding foreign laws and 

regulations. 

2. Comments 

Several commenters urged the 

Commission to use a principles-based 

approach and to review the legal regime 

as a whole, rather than evaluate 

comparability on an issue-by-issue 

basis.424 A commenter supported the 

Commission’s view that comparable 

does not mean identical, and urged the 

Commission to place an emphasis on 

shared principles and mutual 

recognition.425

Some commenters stated that foreign 

jurisdiction laws and regulations are 

unlikely to be identical to those in the 

United States and that they thus support 

the Commission’s proposed ‘‘outcomes 

based approach’’ to evaluating whether 

foreign regulatory requirements meet 

Dodd-Frank normative objectives.426

One of these commenters stated that in 

some cases foreign regulators would be 

faced with several challenges, noting 

that in ‘‘light touch’’ or principle-based 

regulatory jurisdictions, commodity 

derivatives data collection and 

surveillance is weak or even nonexistent, as is concomitant 

enforcement.427

Commenters stressed the need to 

avoid imposing duplicative or 

conflicting regulatory requirements 

which could result in unnecessary 

costs.428 Commenters urged the 

Commission to engage in a dialogue 

with other regulators 429 and to build on 

work done at the international level.430

Some commenters expressed the view 

that substituted compliance should not 

require Commission approval if the 

applicable foreign regulator promulgates 

applicable regulations in accordance 

with G20 commitments, or that a 

presumption that foreign rules are 

comparable should apply if the rules are 

consistent with G20 principles.431 Some 

commenters urged the Commission to 

take what they described as an 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45341 

432See Australian Securities and Investments 

Commission; Hong Kong Monetary Authority; 

Monetary Authority of Singapore; Reserve Bank of 

Australia; Securities and Futures Commission, 

Hong Kong (Aug. 27, 2012) at 2–3. 

433See Deutsche Bank (Aug. 27, 2012) at 6. 

434See European Commission (Aug. 24, 2012) at 

4. 

435See, e.g., Financial Services Authority (United 

Kingdom) (Aug. 24, 2012) at 3. 

436See IIB (Aug. 27, 2012) at 40; American 

Bankers Association, (Aug. 27, 2012) at 2; IATP 

(Aug. 27, 2012) at 11. 

437See American Bankers Association (Aug. 27, 

2012) at 2. 

438See IATP (Aug. 27, 2012) at 11–13. 

439See ESMA (Aug. 27, 2012) at 3–4. 

440See Japan FSA and Bank of Japan (Aug. 13, 

2012) at 2–3. 

441See SIFMA (Aug. 27, 2012) at 3, A46; Futures 

Industry Association (FIA), (Aug. 27, 2012) at 5–7. 

442See IATP (Aug. 27, 2012) at 2–3. 

443See Tradeweb Markets LLC (Aug. 27, 2012) at 

4. 

444See SIFMA (Aug. 27, 2012) at A48; Deutsche 

Bank (Aug. 27, 2012) at 6. 

445See, e.g., CFA Institute (Aug. 27, 2012) at 3; 

Financial Services Authority (United Kingdom) 

(Aug. 24, 2012) at 3; Barclays (Aug. 27, 2012) at 2; 

ICAP Group (Aug. 27, 2012) at 2; IIB (Aug. 27, 2012) 

at 39. 

446See Greenberger (Aug. 27, 2012) at 20–24. 

447See Greenberger (Aug. 27, 2012) at 3, 19, 

22–23. 

448See Greenberger (Aug. 27, 2012) at 19. 

449See Public Citizen (Aug. 27, 2012) at 13, 16, 

19. 

450See Better Markets (Aug. 27, 2012) at 10. 

451See, e.g., Better Markets (Aug. 27, 2012) at 10– 

11; Public Citizen (Aug. 27, 2012) at 13, 16, 19. 

452See Deutsche Bank (Aug. 27, 2012) at 6. 

453See Japanese Bankers Association (Aug. 27, 

2012) at 10. 

454See IATP (Aug. 27, 2012) at 6–7. 

‘‘equivalence approach’’ similar to EMIR 

in the European Union,432 by making 

substituted compliance determinations 

based on recognition of ‘‘equivalent’’ 

jurisdictions and not of individual 

firms.433 The European Commission 

stated that EU firms dealing with U.S. 

counterparties would always be subject 

to the Dodd-Frank Act, while U.S. firms 

dealing with EU counterparties could 

not be subject to EU rules if the EU 

decides to grant equivalence to the 

United States. The European 

Commission stated that it is difficult to 

understand why comparable foreign 

legislation in the EU should not be 

sufficient.434

Commenters, including foreign 

regulators, requested that the 

Commission more clearly outline the 

circumstances under which a particular 

foreign jurisdiction would be acceptable 

for substituted compliance purposes.435

Commenters stressed the need for 

comparability determinations to be 

transparent.436 One commenter stated 

that comparability determinations 

should allow for notice and 

comment.437 Another commenter stated 

that there should be a procedure for 

appeals, that memoranda of 

understanding (‘‘MOUs’’) should form 

the framework for comparability 

determinations, and that the 

Commission should develop a process 

for periodic review of comparability 

determinations.438

Some commenters found the 

Commission’s proposed approach to 

substituted compliance too narrow or 

limiting. The European Securities and 

Markets Authority (‘‘ESMA’’) stated that 

when equivalence or substituted 

compliance is granted for an entire 

jurisdiction, registration should not be a 

prerequisite before substituted 

compliance can apply. ESMA also 

stated that the Commission’s approach 

is quite limited because it is applied not 

uniformly but ‘‘chapter by chapter,’’ 

which ESMA represents contradicts 

what they described as EMIR’s concepts 

of equivalence and mutual 

recognition.439 Japan FSA and Bank of 

Japan expressed concern that the scope 

of application of substituted compliance 

is too narrow and requested that it be 

extended to avoid overlap or conflict 

with foreign regulations.440 Other 

commenters stated that the approach 

being taken toward substituted 

compliance was narrow and not in 

accordance with comity.441 However, 

another commenter stated that 

substituted compliance procedures are 

an inferior option to direct compliance 

with Commission regulations. This 

commenter stated that the Commission 

does not violate principles of 

international comity by extending the 

cross-border application to cover how 

‘‘U.S. persons’’ operate in foreign 

jurisdictions, particularly when those 

jurisdictions lack the laws and/or 

regulatory capacity to prevent damage to 

the U.S. economy resulting from 

counterparty defaults originating in 

foreign affiliate swaps.442

Another commenter stated that 

substituted compliance should be 

expanded to a broader category of swap 

transactions, specifically, to the trade 

execution requirement.443

Some commenters urged the 

Commission to clarify which law is 

‘‘substituted’’ for U.S. law and allow 

swap entities to determine which 

jurisdictions’ laws apply where it could 

be more than one.444

Some commenters expressed concern 

regarding the timing of reform in other 

jurisdictions, urging the Commission to 

delay substituted compliance 

implementation or provide a grace 

period for these jurisdictions.445

Some commenters urged the 

Commission not to allow substituted 

compliance or to use it only sparingly, 

pointing out the risks of substituted 

compliance by the Commission. For 

example, one commenter contended 

that substituted compliance fails to 

ensure rigorous regulation of derivatives 

markets and so should not be allowed 

for foreign subsidiaries of U.S. parents 

as these subsidiaries pose a severe risk 

to the U.S. economy.446 This commenter 

also stated that substituted compliance 

should only be used in ‘‘rare 

circumstances’’ and only after such 

rules in foreign jurisdictions have come 

into existence,447 stating that the 

Commission ‘‘cannot, through its use of 

comity, consider other countries’ 

interests to the total derogation of 

Congress’s intent to protect U.S. 

taxpayers.’’ 448 Citizen and taxpayer 

groups contended that substituted 

compliance should not be permitted 

when the swap transaction is with a 

U.S. counterparty,449 including 

subsidiaries of a U.S. person.450

Commenters also urged that, to the 

extent substituted compliance is 

permitted, a rigorous approach be 

applied, including examining the 

history of enforcement in a foreign 

jurisdiction, the ability to revoke 

substituted compliance where 

necessary, the ability of the public to 

comment on substituted compliance 

applications, periodic review of the 

application of substituted compliance 

and a requirement that the applicant 

immediately inform the Commission of 

any material changes in its 

jurisdiction.451

With regard to SDR Reporting, some 

commenters disagreed with the 

Commission that a foreign trade 

repository must allow Commission 

access to information to be considered 

comparable, arguing that comparability 

should be based solely on the foreign 

jurisdiction’s regulatory regime,452 or 

that access is unnecessary where swaps 

are between non-U.S. counterparties.453

In contrast, another commenter stated 

that open access to foreign swap data 

repositories is necessary to ensure that 

foreign surveillance of transaction-level 

swaps data flow requirements is 

comparable and comprehensive.454

International regulators have 

continued to express commitment to the 

Pittsburgh G20 reforms of OTC 

derivatives regulation, including a 

commitment to harmonize cross-border 

regulations and allow for substituted 

compliance or equivalence 

arrangements when appropriate. 

However, no international consensus 

has emerged regarding the 

implementation of such reforms or the 

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455See letter to Treasury Secretary Lew regarding 

cross-border OTC derivatives regulation from 

Deputy Prime Minister Taro Aso, Minister of State 

for Finance Services, Government of Japan; 

Commissioner Michel Barnier, Commissioner for 

Internal Markets and Services, European 

Commission; Minister Pravin Gordhan, Minister of 

Finance, Government of South Africa; Minister 

Guido Mantega, Ministry of Finance, Government of 

Brazil; Minister Pierre Moscovici, Ministry of 

Finance, Government of France; Chancellor George 

Osborne, Chancellor of the Exchequer, Government 

of the United Kingdom; Minister Wolfgang 

Scha ̈uble, Ministry of Finance, Government of 

Germany; Minister Anton Siluanov, Minister of 

Finance, Government of Russia; and Minister 

Eveline Widmer-Schlumpf, Finance Minister, 

Government of Switzerland (‘‘Nine International 

Regulators’’) (Apr. 18, 2013). See also letter to 

Treasury Secretary Lew from Sens. Kirsten E. 

Gillibrand, Thomas R. Carper, Kay R. Hagan, Heidi 

Heitkamp, Michael F. Bennet, and Charles E. 

Schumer (June 26, 2013) (advocating domestic and 

international harmonization of derivatives 

regulation). 

456 Id. 

457See letter to Nine International Regulators 

from ActionAid International; AFL–CIO (American 

Federation of Labor And Congress of Industrial 

Organizations); Americans for Financial Reform; 

Berne Declaration; Center of Concern; The Centre 

for Research on Multinational Corporations 

(SOMO); Centre national de coope ́ration au 

de ́veloppement, CNCD–11.11.11; CGIL—Italian 

General Confederation of Labour; Consumer 

Federation of America; Global Progressive Forum; 

IBON International; The International Institute for 

Monetary Transformation; Institute for Agriculture 

and Trade Policy (IATP); Institute for Policy 

Studies, Global Economy Project; Jubilee Debt 

Campaign, UK; Kairos Europe (Brussels); 

Missionary Oblates—USP (Washington, DC); 

Oxfam; Red Latinoamericana sobre Deuda, 

Desarrollo y Derechos—LATINDADD; Stamp Out 

Poverty; Tax Justice Network; UBUNTU Forum; 

War on Want; WEED (World Economy, Ecology, 

and Development); and World Development 

Movement (Jul. 1, 2013). 

458 Id. 

459 Id. 

460 Id. 

461Under Commission regulations 23.203 and 

23.606, all records required by the CEA and the 

Commission’s regulations to be maintained by a 

registered swap dealer or MSP shall be maintained 

in accordance with Commission regulation 1.31 and 

shall be open for inspection by representatives of 

the Commission, the United States Department of 

Justice, or any applicable prudential regulator. 

In the January Order, the Commission noted that 

an applicant for registration as a swap dealer or 

MSP must file a Form 7–R with the National 

Futures Association and that Form 7–R was being 

modified at that time to address existing blocking, 

privacy or secrecy laws of foreign jurisdictions that 

applied to the books and records of swap dealers 

and MSPs acting in those jurisdictions. See 78 FR 

at 871–872 n. 107. The modifications to Form 7– 

R were a temporary measure intended to allow 

swap dealers and MSPs to apply for registration in 

a timely manner in recognition of the existence of 

the blocking, privacy, and secrecy laws. The 

Commission clarifies that the change to Form 7–R 

impacts the registration application only and does 

not modify the Commission’s authority under the 

CEA and its regulations to access records held by 

registered swap dealers and MSPs. Commission 

access to a registrant’s books and records is a 

fundamental regulatory tool necessary to properly 

monitor and examine each registrant’s compliance 

with the CEA and the regulations adopted pursuant 

thereto. The Commission has maintained an 

ongoing dialogue on a bilateral and multilateral 

basis with foreign regulators and with registrants to 

address books and records access issues and may 

consider appropriate measures where requested to 

do so. 

462The types of offices which the Commission 

would consider to be a ‘‘foreign branch’’ of a U.S. 

bank, and the circumstances in which a swap is 

with such foreign branch, are discussed further in 

section IV.C.3, supra. 

circumstances under which substituted 

compliance should be permitted. In an 

April 18, 2013 letter to Treasury 

Secretary Lew, nine international 

financial regulators expressed concern 

about fragmentation in the OTC 

derivatives market as a result of lack of 

regulatory coordination, noting that 

‘‘[a]n approach in which jurisdictions 

require that their own domestic 

regulatory rules be applied to their 

firms’ derivatives transactions taking 

place in broadly equivalent regulatory 

regimes abroad is not sustainable.’’ 455

The letter expressed concern that such 

an approach would lead the global 

derivatives market to ‘‘recede into 

localized and less efficient structures, 

impairing the ability of business across 

the globe to manage risk.’’ The letter 

also suggested, among other things, that 

cross-border rules be adopted that 

would not result in duplicative or 

conflicting requirements through 

substituted compliance or equivalence 

arrangements, and that a reasonable 

transition period and measures be 

provided to foreign entities to ensure a 

smooth transition.456

A group of 25 organizations from 

numerous nations responded by 

asserting that the letter to Treasury 

Secretary Lew ‘‘appears to place a 

higher priority on preventing 

‘fragmentation’ in global financial 

markets than on effective management 

of global financial risks.’’ 457

Emphasizing that the global financial 

crisis of 2008–2009 caused ‘‘mass 

unemployment, home foreclosures, and 

cutbacks in key public services,’’ these 

organizations argued that ‘‘[s]ince G–20 

nations have not yet met their 2009 

Pittsburgh commitment to put in place 

effective derivatives regulation by the 

close of 2012, the first priority should be 

to complete this crucial element of 

financial oversight.’’ 458 Although these 

organizations recognized the challenge 

of effectively regulating the global 

financial markets, they asserted that 

‘‘the path to addressing these challenges 

does not lie in further delays that 

prevent any nation from acting until 

every jurisdiction globally has agreed on 

a similar approach.’’ 459 Instead, these 

organizations urged the international 

community ‘‘to coordinate around a 

shared high level of financial oversight, 

and in the meantime to support the 

efforts of individual nations to ensure 

that the scope of their financial 

regulation properly captures all 

transactions, wherever conducted, that 

affect the safety and stability of each 

national financial system.’’ 460

3. Overview of the Substituted 

Compliance Regime 

Once registered, a non-U.S. swap 

dealer or non-U.S. MSP would become 

subject to all of the substantive 

requirements under Title VII of the 

Dodd-Frank Act that apply to registered 

swap dealers or MSPs. In other words, 

the requirements under Title VII of the 

Dodd-Frank Act related to swap dealers 

and MSPs apply to all registered swap 

dealers and MSPs, irrespective of where 

they are based. 

Consistent with CEA section 2(i) and 

comity principles, the Commission’s 

policy generally is that eligible entities 

may comply with a substituted 

compliance regime under certain 

circumstances, subject, however, to the 

Commission’s retention of its 

examination authority 461 and its 

enforcement authority. To the extent 

that the substituted compliance regime 

applies, the Commission generally 

would permit a non-U.S. swap dealer or 

MSP, U.S. bank that is a swap dealer or 

MSP with respect to its foreign 

branches,462 or non-U.S. non-registrant 

that is a guaranteed or conduit affiliate, 

as applicable, to substitute compliance 

with the requirements of the relevant 

home jurisdiction’s law and regulations 

(or in the case of foreign branches of a 

bank, the foreign location of the branch) 

in lieu of compliance with the attendant 

Entity-Level Requirements and/or 

Transaction-Level Requirements under 

the CEA and Commission regulations, 

provided that the Commission finds that 

such home jurisdiction’s requirements 

(or in the case of foreign branches of a 

bank, the foreign location of the branch) 

are comparable with and as 

comprehensive as the corollary area(s) 

of regulatory obligations encompassed 

by the Entity- and Transaction-Level 

Requirements. Significantly, the 

Commission will rely upon an 

outcomes-based approach to determine 

whether these requirements achieve the 

same regulatory objectives of the DoddFrank Act. An outcomes-based approach 

in this context means that the 

Commission is likely to review the 

requirements of a foreign jurisdiction for 

rules that are comparable to and as 

comprehensive as the requirements of 

the Dodd-Frank Act, but it will not 

require that the foreign jurisdiction have 

identical requirements to those 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45343 

463For example, under part 30 of the 

Commission’s regulations, if the Commission 

determines that compliance with the foreign 

regulatory regime would offer comparable 

protection to U.S. customers transacting in foreign 

futures and options and there is an appropriate 

information-sharing arrangement between the home 

supervisor and the Commission, the Commission 

has permitted foreign brokers to comply with their 

home regulations (in lieu of the applicable 

Commission regulations), subject to appropriate 

conditions. See, e.g., Foreign Futures and Options 

Transactions, 67 FR 30785 (May 8, 2002); Foreign 

Futures and Options Transactions, 71 FR 6759 (Feb. 

9, 2009). 

Upon promulgating part 30, the Commission 

stated that it ‘‘intends to monitor closely the 

application of this regulatory scheme for the offer 

and sale of foreign futures and foreign options in 

the U.S. and to make adjustments in these rules, as 

necessary, based, in part, on it experience in 

administering the exemptive procedure [i.e., 30.10 

relief] as well as other requests for interpretations 

of the provisions herein.’’ Foreign Futures and 

Foreign Options Transactions, 52 FR 28980, 28993 

(Aug. 5, 1987). For example, the Commission has 

expanded part 30 to allow 30.10-exempt foreign 

brokers to act as introducing brokers for the purpose 

of executing linked U.S. transactions on behalf of 

U.S. customers under certain circumstances. The 

Commission also promulgated regulation 30.12 to 

allow unlicensed ‘‘local’’ brokers located outside 

the United States to execute trades through the 

customer omnibus account of an FCM or 30.10 

exempt foreign broker, again under certain 

circumstances. The Commission expects that the 

substituted compliance process contemplated by 

this Guidance may similarly evolve. 

464As stated in note 88, for purposes of this 

Guidance, the terms ‘‘home jurisdiction’’ or ‘‘home 

country’’ are used interchangeably and refer to the 

jurisdiction in which the person or entity is 

established, including the European Union. Further, 

the Commission clarifies that where a non-U.S. 

swap dealer (or non-U.S. MSP), or a non-U.S. nonregistrant that is a guaranteed or conduit affiliate, 

transacts outside the home jurisdiction, substituted 

compliance is available and they may comply with 

the comparable and comprehensive requirements of 

the home jurisdiction, provided that they comply 

with such requirements in that other jurisdiction. 

465The Commission recognizes that substantial 

progress has been made in other jurisdictions 

towards implementing OTC derivatives reform. For 

example, EMIR requires financial counterparties, 

including hedge funds, to clear OTC derivatives 

contracts subject to the clearing obligation through 

a central counterparty registered or recognized in 

accordance with EMIR. EMIR also requires such 

entities to comply with EMIR’s risk mitigation 

techniques for uncleared OTC derivatives contracts; 

risk mitigation techniques include, confirmation, 

portfolio reconciliation, compression, valuation and 

dispute resolution. Lastly, EMIR requires financial 

counterparties to report all derivatives contracts to 

a trade repository registered or recognized in 

accordance with EMIR. 

466The Commission notes that, of the 35 

provisionally registered non-U.S. swap dealers as of 

July 12, 2013, all but one of them are banking 

entities that are subject to prudential supervision by 

banking supervisors in their home jurisdictions or 

affiliates of such banks. By comparison, 19 of the 

provisionally registered U.S. swap dealers and 

MSPs are not regulated by a prudential supervisor 

or the SEC. 

467The Commission notes that such alternatives 

are available for both Entity- and Transaction-Level 

Requirements, but are more likely appropriate for 

Entity-Level Requirements. 

established under the Dodd-Frank Act. 

This approach builds on the 

Commission’s longstanding policy of 

recognizing comparable regulatory 

regimes based on international 

coordination and comity principles with 

respect to cross-border activities 

involving futures (and options on 

futures).463 The Commission anticipates 

that its approach also will require close 

consultation, cooperation, and 

coordination among the Commission 

and relevant foreign regulators regarding 

ongoing compliance efforts. To date, the 

Commission notes that it has engaged in 

many multilateral and bilateral 

consultations and efforts to coordinate 

on the substance of OTC derivatives 

reform efforts. 

In part, because many foreign 

jurisdictions have been implementing 

OTC derivatives reforms in an 

incremental manner, the Commission’s 

comparability determinations may be 

made on a requirement-by-requirement 

basis, rather than on the basis of the 

foreign regime as a whole. For example, 

many jurisdictions have moved more 

quickly to implement reporting to trade 

repositories, and so the Commission 

may focus first on comparability with 

those requirements. In addition, in 

making its comparability 

determinations, the Commission may 

include conditions that take into 

account timing and other issues related 

to coordinating the implementation of 

reform efforts across jurisdictions. 

A non-U.S. swap dealer or non-U.S. 

MSP, a U.S. bank that is a swap dealer 

or MSP with respect to its foreign 

branches, or non-U.S. non-registrant 

that is a guaranteed or conduit affiliate, 

to the extent applicable under this 

Guidance, may comply with regulations 

in its home jurisdiction (or in the case 

of foreign branches of a bank, the 

foreign location of the branch) to the 

extent that the Commission determines 

that these requirements are comparable 

to, and as comprehensive as, the 

corollary areas of the CEA and 

Commission regulations.464 As noted 

above, however, the home jurisdiction’s 

requirements do not have to be identical 

to the Dodd-Frank Act requirements. 

Moreover, the Commission notes, 

however, that entities relying on 

substituted compliance may be required 

to comply with certain of the DoddFrank Act requirements where 

comparable and comprehensive 

regulation in their home jurisdiction (or 

in the case of foreign branches of a bank, 

the foreign locations of the branches) are 

determined to be lacking.465

In evaluating whether a particular 

category of foreign regulatory 

requirement(s) is comparable and 

comprehensive to the applicable 

requirement(s) under the CEA and 

Commission regulations, the 

Commission will take into consideration 

all relevant factors, including but not 

limited to, the comprehensiveness of 

those requirement(s), the scope and 

objectives of the relevant regulatory 

requirement(s), the comprehensiveness 

of the foreign regulator’s supervisory 

compliance program, as well as the 

home jurisdiction’s authority to support 

and enforce its oversight of the 

registrant. In this context, comparable 

does not necessarily mean identical. 

Rather, the Commission would evaluate 

whether the home jurisdiction’s 

regulatory requirement is comparable to 

and as comprehensive as the 

corresponding U.S. regulatory 

requirement(s). 

In response to comments requesting 

greater clarity with respect to the 

substituted compliance determinations, 

the Commission notes that a 

comparability analysis would begin 

with a consideration of the regulatory 

objectives of a foreign jurisdiction’s 

regulation of swaps and swaps market 

participants. In this regard, the 

Commission will first look to foreign 

regulator’s swap-specific regulations. 

The Commission recognizes, however, 

that jurisdictions may not have swapspecific regulations in some areas, and 

instead may have regulatory or 

supervisory regimes that achieve 

comparable and comprehensive 

regulatory objectives as the Dodd-Frank 

Act requirements, but on a more 

general, entity-wide, or prudential, 

basis.466 In addition, portions of a 

foreign regulatory regime may have 

similar regulatory objectives, but the 

means by which these objectives are 

achieved with respect to swaps market 

activities may not be clearly defined, or 

may not expressly include specific 

regulatory elements that the 

Commission concludes are critical to 

achieving the regulatory objectives or 

outcomes required under the CEA and 

the Commission’s regulations. In these 

circumstances, the Commission 

anticipates that, as part of its broader 

efforts to consult and coordinate with 

foreign jurisdictions, it will work with 

the regulators and registrants in these 

jurisdictions to consider alternative 

approaches that may result in a 

determination that substituted 

compliance applies.467

The approaches used will vary 

depending on the circumstances 

relevant to each jurisdiction. One 

example would include coordinating 

with the foreign regulators in 

developing appropriate regulatory 

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45344 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

468The Commission anticipates that non-U.S. 

swap dealers and MSPs may require additional time 

after a Substituted Compliance Determination in 

order to phase in compliance with the relevant 

requirements of the jurisdiction in which the nonUS swap dealer or MSP is established. The 

Commission and its staff intend to address the need 

for any further transitional relief at the time that the 

subject Substituted Compliance Determination is 

made. 

469A finding of comparability may not be 

possible for a number of reasons, including the fact 

that the foreign jurisdiction has not yet 

implemented or finalized particular requirements. 

470As previously noted, where the counterparty 

to a swap with a foreign branch is a non-U.S. person 

(whether or not such non-U.S. person is guaranteed 

or otherwise supported by, or is an affiliate conduit 

of, a U.S. person), the Commission continues to be 

of the view that compliance with comparable and 

comprehensive requirements in the foreign 

jurisdiction should be permitted in light of the 

supervisory interest of the foreign jurisdiction in 

the swaps transacted in that jurisdiction, together 

with the fact that foreign branches of U.S. swap 

dealers or U.S. MSPs are subject generally to direct 

or indirect oversight by U.S. regulators because they 

are part of a U.S. person. As discussed further in 

section IV.F.3, supra, the Commission’s recognition 

of substituted compliance would be based on an 

evaluation of whether the requirements of the home 

jurisdiction are comparable and comprehensive to 

the applicable requirement(s) under the CEA and 

Commission regulations based on a consideration of 

all relevant factors, including among other things: 

(i) The comprehensiveness of the foreign regulator’s 

supervisory compliance program and (ii) the 

authority of such foreign regulator to support and 

enforce its oversight of the registrant’s branch or 

agency with regard to such activities to which 

substituted compliance applies. 

471The Commission may, as it deems appropriate 

and necessary, conduct an on-site examination of 

the applicant, as well as consult with the 

applicant’s home regulator regarding the status of 

the applicant. For certain matters, the Commission 

may request an opinion of counsel. 

changes or new regulations, particularly 

where changes or new regulations 

already are being considered or 

proposed by the foreign regulators or 

legislative bodies. As another example, 

the Commission may, after consultation 

with the appropriate regulators and 

market participants, include in its 

substituted compliance determination a 

description of the means by which 

certain swaps market participants can 

achieve substituted compliance within 

the construct of the foreign regulatory 

regime. The identification of the means 

by which substituted compliance is 

achieved would be designed to address 

the regulatory objectives and outcomes 

of the relevant Dodd-Frank Act 

requirements in a manner that does not 

conflict with a foreign regulatory regime 

and reduces the likelihood of 

inconsistent regulatory obligations. For 

example, the Commission may specify 

that swap dealers and MSPs in the 

jurisdiction undertake certain 

recordkeeping and documentation for 

swap activities that otherwise is only 

addressed by the foreign regulatory 

regime with respect to financial 

activities generally. In addition, the 

substituted compliance determination 

may include provisions for summary 

compliance and risk reporting to the 

Commission to allow the Commission to 

monitor whether the regulatory 

outcomes are being achieved. By using 

these approaches, in the interest of 

comity, the Commission would seek to 

achieve its regulatory objectives with 

respect to the Commission’s registrants 

that are operating in foreign 

jurisdictions in a manner that works in 

harmony with the regulatory interests of 

those jurisdictions.468

4. Process for Comparability 

Determinations 

Any comparability analysis will be 

based on a comparison of specific 

foreign requirements against specific 

related CEA provisions and Commission 

regulations in 13 categories of regulatory 

obligations and will consider the factors 

described above. After receiving a 

submission from an applicant, the 

resulting comparability determination 

would be made by the Commission with 

regard to each of the 13 categories of 

regulatory obligations, as appropriate. 

More specifically, the Commission 

could determine that a particular set of 

foreign laws and regulations provides a 

sufficient basis for an affirmative 

finding of comparability with respect to 

a relevant area of regulatory obligations. 

Where no comparability determination 

can be made,469 the non-U.S. swap 

dealer or non-U.S. MSP, U.S. bank that 

is a swap dealer or MSP with respect to 

its foreign branches, or non-registrant, to 

the extent applicable under this 

Guidance, may be required to comply 

with the applicable Entity- or 

Transactional-Level requirements under 

the CEA and Commission regulations. 

Anyone who is eligible for substituted 

compliance may apply, either 

individually or collectively, as may 

foreign regulators. Persons who may 

request a comparability determination 

include: (i) Foreign regulators, (ii) an 

individual non-U.S. entity, or group of 

non-U.S. entities; (iii) a U.S. bank that 

is a swap dealer or MSP with respect to 

its foreign branches; 470 or (iv) a trade 

association, or other group, on behalf of 

similarly-situated entities. Persons 

requesting a comparability 

determination may want to coordinate 

their application with other market 

participants and their home regulators 

to simplify and streamline the process. 

Once a comparability determination is 

made for a jurisdiction, it will apply for 

all entities or transactions in that 

jurisdiction to the extent provided in 

the determination, as approved by the 

Commission. 

Generally, the Commission would 

expect that the applicant, at a minimum, 

state with specificity the factual and 

legal basis for requesting that the 

Commission find that a particular set of 

foreign laws and regulations is 

comparable to, and as comprehensive 

as, particular Dodd-Frank Act 

requirements as described above; 

include with specificity all applicable 

legislation, rules, and policies; and 

provide an assessment whether the 

objectives of the two regulatory regimes 

are comparable and comprehensive.471

If the applicant is a registered swap 

dealer or MSP, it also would generally 

be helpful to understand the capacity in 

which the applicant is licensed with the 

applicant’s regulator(s) in its home 

country and whether the applicant is in 

good standing. 

The Commission expects that the 

comparability analysis process would, 

in most cases, involve consultation with 

the regulators in each jurisdiction for 

which a substituted compliance 

application has been submitted so that 

the Commission may better analyze the 

compliance regime of a jurisdiction. 

Consultations are particularly important 

in the near future because many 

jurisdictions are in the process of 

finalizing and implementing their 

derivatives reforms incrementally and 

the Commission’s comparability 

determinations may need to take into 

account the timing of regulatory reforms 

that have been proposed or finalized, 

but not yet implemented. 

Further, the Commission expects that, 

in connection with a determination that 

substituted compliance is appropriate, it 

would enter into an appropriate MOU or 

similar arrangement between the 

Commission and the relevant foreign 

regulator(s). Existing informationsharing and/or enforcement 

arrangements would be indicative of a 

foreign supervisor’s ability to share 

information and otherwise work with 

the Commission. However, going 

forward, the Commission and relevant 

foreign supervisor(s) would need to 

establish supervisory MOUs or other 

arrangements that provide for 

information sharing and cooperation in 

the context of supervising swap dealers 

and MSPs. The Commission 

contemplates that such a supervisory 

MOU would establish the type of 

coordination activities that would 

continue on an ongoing basis between 

the Commission and the foreign 

supervisor(s), including topics such as 

procedures for confirming continuing 

oversight activities, access to 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45345 

472As previously noted, the Commission observes 

that under section 4s(j)(3) and (4) of the CEA and 

Commission regulation 23.606, a registered swap 

dealer or MSP must make all records required to be 

maintained in accordance with Commission 

regulation 1.31 available to the Commission 

promptly upon request to representatives of the 

Commission. The Commission reserves this right to 

access records held by registered swap dealers and 

MSPs, including those that are non-U.S. persons 

who may comply with the Dodd-Frank 

recordkeeping requirement through substituted 

compliance. See also 7 U.S.C. 6s(f); 17 CFR 23.203. 

473 In this regard, the Commission has started 

working with foreign regulators to prepare for such 

arrangements. 

474Section 727 of the Dodd Frank Act added to 

the CEA new section 2(a)(13)(G), which requires all 

swaps, whether cleared or uncleared, to be reported 

to registered SDRs. Section 21 of the CEA, added 

by section 728 of the Dodd Frank Act, directs the 

Commission to prescribe standards that specify the 

data elements for each swap that shall be collected 

and maintained by each registered SDR. Part 45 of 

the Commission’s regulations establishes swap data 

recordkeeping and SDR reporting requirements; 

part 46 establishes similar requirements for preenactment and transition swaps (collectively, 

‘‘historical swaps’’). 

475As noted above, EMIR requires financial 

counterparties, including hedge funds, to clear OTC 

derivatives contracts subject to the clearing 

obligation through a CCP registered or recognized 

in accordance with EMIR. 

476Registration of Foreign Boards of Trade, 76 FR 

80674, 80681–80682 (Dec. 23, 2011) (the PFMIs are 

the successor standards to the Recommendations 

for Central Counterparties (‘‘RCCPs’’), which were 

issued jointly by the Committee on Payment and 

Settlement Systems (‘‘CPSS’’) and the Technical 

Committee of IOSCO). 

477 Inter-Affiliate Exemption, 78 FR at 21784 

(adopting 17 CFR 50.52(b)(4)(i)(E)). 

information,472 on-site visits, and 

notification procedures in certain 

situations.473

The Commission expects that an 

applicant would notify the Commission 

of any material changes to information 

submitted in support of a comparability 

determination (including, but not 

limited to, changes in the relevant 

supervisory or regulatory regime) as the 

Commission’s comparability 

determination may no longer be valid. 

Within four years of issuing any 

Substituted Compliance Determination, 

the Commission will reevaluate its 

initial determination to ascertain 

whether any changes should be made to 

its finding and shall reissue the relevant 

Commission action, conditionally or 

unconditionally, as it deems 

appropriate. 

SDR Reporting and real-time public 

reporting would generally be eligible for 

substituted compliance, as outlined 

above, but only if the Commission has 

direct access to all of the reported swap 

data elements that are stored in a foreign 

trade repository. The Commission 

intends that direct access would 

generally include, at a minimum, real 

time, direct electronic access to the data 

and the absence of any legal 

impediments to the Commission’s 

access to the data. Due to the technical 

nature of this inquiry, a comparability 

evaluation for SDR Reporting and realtime public reporting would generally 

entail a detailed comparison and 

technical analysis. The Commission 

notes that while direct access to swap 

data is a threshold matter to be 

addressed in a comparability evaluation, 

a more particularized analysis would 

generally be necessary to determine 

whether the data stored in a foreign 

trade repository provides for effective 

Commission use, in furtherance of the 

regulatory purposes of the Dodd-Frank 

Act. 

Comparability determinations for SDR 

Reporting and real-time public reporting 

would generally take into account 

whether the Commission may 

effectively access and use data stored in 

foreign trade repositories, both in 

isolation and when compared to and 

aggregated with swap data from other 

foreign trade repositories, as well as 

registered SDRs. At a minimum, 

effective use would generally require 

that the data elements stored in foreign 

trade repositories are sufficient to 

permit comparison and aggregation, and 

that all transactions with comparable 

required data elements, otherwise 

required to be reported to a registered 

SDR, are available in the foreign trade 

repository. 

5. Conflicts Arising Under Privacy and 

Blocking Laws 

Potential and actual conflicts between 

the Commission’s regulations and the 

privacy and blocking laws of some nonU.S. jurisdictions may, in certain 

circumstances, limit or prohibit the 

disclosure of data that is required to be 

reported under the Dodd-Frank Act and 

implementing regulations.474 For 

example, the Commission’s part 45 and 

part 46 swap data reporting rules 

establish swap data recordkeeping and 

SDR reporting requirements applicable 

to reporting counterparties. Among 

other requirements, these rules 

prescribe certain reporting data fields 

for all swaps subject to the 

Commission’s jurisdiction, including 

the identity of each counterparty to a 

swap. The privacy laws of some nonU.S. jurisdictions may, however, restrict 

or prohibit the disclosure by a reporting 

party or registrant of a non-reporting 

party’s identity. In some jurisdictions, 

this privacy restriction may be 

overcome if the counterparty consents 

to the disclosure. In others, the 

restriction may take the form of a 

blocking statute which acts as an 

absolute prohibition to the disclosure of 

information, creating a direct conflict 

with the requirements of the DoddFrank Act. 

The Commission recognizes that, 

notwithstanding the importance of swap 

data to its mandate under the DoddFrank Act, its regulations may be in 

conflict with the blocking, privacy, and/ 

or secrecy laws of other jurisdictions. 

The Commission is mindful of the 

challenges presented by such 

circumstances and continues to work on 

a bilateral and multilateral basis with 

foreign regulators to address these 

issues. Where appropriate, the 

Commission may consider reasonable 

alternatives that allow the Commission 

to fulfill its mandate while respecting 

the regulatory interests of other 

jurisdictions. In that regard, where a real 

conflict of laws exists, the Commission 

strongly encourages regulators and 

registrants to consult directly with its 

staff. 

6. Clearing 

a. Clearing Venues 

With respect to acceptable clearing 

venues, the Commission notes that 

section 2(h)(1) of the CEA provides that 

swaps subject to the clearing 

requirement must be submitted for 

clearing to a registered DCO or a DCO 

that is exempt from registration under 

the CEA.475

The Commission has previously 

recognized the role of foreign-based 

clearing organizations, including in the 

context of FBOTs. Specifically, in the 

final rules pertaining to Registration of 

Foreign Boards of Trade, the 

Commission required that an FBOT, in 

order to be registered, clear through a 

clearing organization that either is 

registered with the Commission as a 

DCO or observes the Principles for 

Financial Market Infrastructures 

(‘‘PFMIs’’).476 Other relevant 

requirements in the FBOT final rules 

include, among other things, that the 

clearing organization be in good 

regulatory standing in its home country. 

In addition, in the final rules adopting 

the Inter-Affiliate Exemption, the 

Commission permitted eligible affiliated 

counterparties that are located in certain 

jurisdictions to satisfy a condition to 

electing the exemption (requiring 

counterparties to clear their swaps with 

third-parties) by clearing the swap 

through a registered DCO or a clearing 

organization that is subject to 

supervision by appropriate government 

authorities in the clearing organization’s 

home country and that has been 

assessed to be in compliance with the 

PFMIs.477

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45346 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

478Specifically, section 5b(h) of the CEA provides 

that ‘‘[t]he Commission may exempt, conditionally 

or unconditionally, a derivatives clearing 

organization from registration under this section for 

the clearing of swaps if the Commission determines 

that the [DCO] is subject to comparable, 

comprehensive supervision and regulation by the 

Securities and Exchange Commission or the 

appropriate government authorities in the home 

country of the organization.’’ 7 U.S.C. 7a–1(h). See 

also Core Principles and Other Requirements for 

Swap Execution Facilities, 78 FR 33476, 33591 (Jun. 

4, 2013) (adopting 17 CFR 37.701) (‘‘Part 37 SEF 

Regulations’’). 

479 Id. at 33534. 

480The PFMIs were developed with significant 

input and public comment from market 

participants, and benefited from broad participation 

of market regulators and prudential supervisors 

from multiple nations. The PFMIs were approved 

by both IOSCO’s Technical Committee and the 

CPSS and published in April 2012. 

481The Commission recognizes that certain DCOs 

registered with the Commission also may be 

authorized, licensed, or recognized by a foreign 

authority. The Commission continues to work on a 

bilateral basis with such non-US authorities with 

respect to issues of central counterparty 

supervision. The Commission also participates in 

multilateral discussions with its foreign 

counterparts through a number of international 

groups. 

482See Clearing Exemption for Swaps Between 

Certain Affiliated Entities, 78 FR 21749; 

Commission regulation 50.52(b)(4)(i). 

483As such term is defined in Commission 

regulation 50.52(a). 

484See Clearing Requirement Determination, 77 

FR 74284. 

485See End-User Exception to the Clearing 

Requirement for Swaps, 77 FR 42560. 

486 If the Foreign End-User is an issuer of 

securities under, or required to file reports pursuant 

to, the Securities Exchange Act of 1934 (‘‘SEC 

Filer’’), then the Foreign End-User must obtain the 

approval to enter into uncleared swaps from an 

appropriate committee of the SEC Filer’s board of 

directors (or governing body). See section 2(j) of the 

CEA. The Commission considers a counterparty 

controlled by an SEC Filer to be an SEC Filer itself 

for the purposes of the end-user exception. See 77 

FR 42570. 

487 In these situations, the counterparties should 

comply with laws of the foreign jurisdiction. See 

Commission regulations 50.52(b)(4)(i)(B) and (D). 

488Foreign End-Users may look to Commission 

regulation 50.50(c) in order to determine whether 

a swap hedges or mitigates commercial risk. 

489This guidance is only applicable to 

Commission regulation 50.52(b)(4)(i)(C); all other 

persons electing the End-User Exception must 

comply with the requirements of section 2(h)(7) of 

the CEA and Commission regulation 50.50. 

More recently, in the final rulemaking 

adopting Core Principles and Other 

Requirements for Swap Execution 

Facilities, the Commission noted that 

under section 5b(h) of the CEA it has 

discretionary authority to exempt DCOs, 

conditionally or unconditionally, from 

the applicable DCO registration 

requirements.478 Thus, the Commission 

has discretion to exempt from 

registration DCOs that, at a minimum, 

are subject to comparable and 

comprehensive supervision by another 

regulator. The Commission further 

noted that it had not yet exercised its 

discretionary authority to exempt DCOs 

from registration. The Commission 

explained that, notwithstanding that 

there were no exempt DCOs at that time, 

certain swaps executed on a SEF could 

be cleared at an exempt DCO, if and 

when the Commission determined to 

exercise its authority to exempt DCOs 

from applicable registration 

requirements, at which time the 

Commission would likely address, 

among other things, the conditions and 

limitations applicable to clearing swaps 

for customers subject to section 4d(f) of 

the CEA.479

The conditions that may have to be 

met for a clearing organization to be 

eligible to qualify as an exempt DCO 

could include, among other things: (i) 

The Commission having entered into an 

appropriate memorandum of 

understanding or similar arrangement 

with the relevant foreign supervisor in 

the clearing organization’s home 

country and (ii) the clearing 

organization having been assessed to be 

in compliance with the PFMIs.480 The 

use of the PFMIs, an international 

standard that is substantially similar to 

the requirements for registered DCOs 

under part 39 of the Commission’s 

regulations, would be consistent with 

the Commission’s determination in the 

context of FBOTs.481

The Commission notes that its 

exemptive authority under CEA section 

5b(h) is entirely discretionary. 

Accordingly, the Commission is not 

compelled to exempt any clearing 

organization from the DCO registration 

requirements, even upon a finding that 

a facility is ‘‘subject to comparable, 

comprehensive supervision and 

regulation’’ by another regulator. 

b. Foreign End-Users 

One of the conditions of the InterAffiliate Exemption, known as the 

‘‘treatment of outward-facing swaps’’ 

condition, generally requires the 

clearing of swaps between affiliated 

counterparties and their unaffiliated 

counterparties.482 Pursuant to 

Commission regulation 50.52(b)(4)(i)(C), 

eligible affiliate counterparties 483 can 

satisfy the treatment of outward-facing 

swaps condition by complying with the 

requirements of an exception or 

exemption under section 2(h)(7) of the 

CEA or part 50 of the Commission’s 

regulations. Pursuant to section 2(h)(7) 

of the CEA, also known as the end-user 

exception, a counterparty to a swap that 

is subject to the clearing requirement 484

may elect not to clear the swap provided 

that such counterparty meets the 

conditions of section 2(h)(7)(A)(i)–(iii) 

of the CEA and the attendant 

regulations.485

For the purposes of the Inter-Affiliate 

Exemption, consistent with section 2(i), 

the Commission will permit a non-U.S. 

person eligible affiliate counterparty to 

satisfy Commission regulation 

50.52(b)(4)(i)(C) for swaps entered into 

with an unaffiliated non-US person that 

is not otherwise subject to the CEA 

(‘‘Foreign End-User’’), under certain 

circumstances. The Foreign End-User 

may elect the end-user exception as if 

the provisions of sections 2(h)(7)(A)(i) 

and (ii) of the CEA apply to the Foreign 

End-User and the Foreign End-User 

elects not to clear the swap.486

Accordingly, a Foreign End-User may 

elect not to clear a swap if (1) the 

Foreign End-User and non-US person 

eligible affiliate counterparty are not 

located in a foreign jurisdiction in 

which the Commission has determined 

that a comparable and comprehensive 

clearing requirement exists and that the 

exceptions and/or exemptions thereto 

are comparable and comprehensive; 487

(2) the Foreign End-User is not a 

financial entity as provided in section 

2(h)(7)(A)(i) of the CEA; and (3) the 

Foreign End-User enters into the swap 

to hedge or mitigate commercial risk as 

provided in section 2(h)(7)(A)(ii) of the 

CEA.488 In the interests of international 

comity, the Commission will not require 

the Foreign End-User to satisfy the 

provisions of section 2(h)(7)(A)(iii) of 

the CEA which require the end-user to 

notify the Commission how it generally 

meets its financial obligations 

associated with entering into noncleared swaps.489

G. Application of the Entity-Level and 

Transaction-Level Requirements to 

Swap Dealers and MSPs 

This section sets forth the 

Commission’s policy on application of 

the Entity-Level and Transaction-Level 

Requirements to swap dealers and 

MSPs, including when swaps generally 

would be eligible for substituted 

compliance. 

1. Comments 

As noted in section E above, 

commenters generally supported the 

division of Dodd-Frank’s swaps 

provisions (and Commission regulations 

thereunder) into Entity-Level and 

Transaction-Level Requirements for 

purposes of this Guidance. Certain of 

these commenters, however, made 

specific recommendations for 

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490See section E, supra. 

491See SIFMA (Aug. 27, 2012) at A36. See also 

State Street (Aug. 27, 2012) at 2; IIB (Aug. 27, 2012) 

at 27–28; The Clearing House (Aug. 27, 2012) at 4, 

27. 

492See Public Citizen (Aug. 27, 2012) at 13 

(arguing that substituted compliance should not be 

permitted when the swap involves a U.S. 

counterparty and that Transaction-Level 

Requirements should be required for counterparties 

that are non-U.S. persons). See also IATP (Aug. 27, 

2012) at 7–8 (recommending that Transaction-Level 

Requirements apply to transactions between nonU.S. swap dealers or MSPs and a U.S. person who 

is not a swap dealer or MSP). 

493See IIAC (Aug. 27, 2012) at 8. 

494See, e.g., Clearing House (Aug. 27, 2012) at 

22–24 (arguing that pre- and post-trade 

transparency rules should not apply to interactions 

with non-U.S. customers); SIFMA (Aug. 27, 2012) 

at A37 (stating that real-time public reporting 

requirements would be inappropriate for swaps 

involving only non-U.S. counterparties). 

495See Australian Bankers (Aug. 27, 2012) at 5, 

A8. 

496See SIFMA (Aug. 27, 2012) at A38. 

497See Australian Bankers (Aug. 27, 2012) at 4, 

A10. See also IIAC (Aug. 27, 2012) at 8 (agreeing 

that external business conduct standards should not 

apply to swaps between non-U.S. swap dealers and 

MSPs and non-U.S. counterparties (whether or not 

guaranteed by a U.S. person)). 

498See Restatement secs. 403(2)(a)–(c), 403(2)(e). 

499See Restatement secs. 403(2)(d), 403(2)(f). 

500See Restatement sec. 403(2)(g). 

reclassification of some of these 

requirements.490

In addition, some commenters 

addressed perceived disparities in the 

application of Transaction-Level 

Requirements to U.S. swap dealers, 

stating that transactions between U.S. 

swap dealers and non-U.S. 

counterparties should be eligible for 

substituted compliance for TransactionLevel Requirements so as to avoid 

putting U.S. swap dealers at a 

competitive disadvantage.491

Other commenters supported the 

Commission’s proposed application of 

the Transaction-Level Requirements to 

the transactions of U.S. persons with 

non-U.S. persons.492 One commenter 

stated that the Transaction-Level 

Requirements should apply to 

transactions by registered swap dealers 

and MSPs with U.S. persons.493

Several commenters objected to the 

applicability of certain TransactionLevel Requirements to transactions 

between two non-U.S. parties.494 One 

commenter stated that TransactionLevel Requirements should never apply 

to swaps between counterparties that 

are both non-U.S. persons.495

With respect to external business 

conduct standards, one commenter 

stated that these standards should not 

apply to swaps between U.S. swap 

entities and non-U.S. persons because 

the Commission’s supervisory interest 

in these transactions are less implicated 

when the counterparty is a non-U.S. 

person.496 Other commenters also stated 

that the external business conduct 

standards should not apply to 

transactions between two non-U.S. 

persons.497

2. Commission Guidance 

The Commission has carefully 

considered the comments on EntityLevel and Transaction-Level 

Requirements. With regard to U.S. swap 

dealers and U.S. MSPs, the 

Commission’s policy is that they 

generally would be expected to comply 

in full with all of the Entity-Level 

Requirements and Transaction-Level 

Requirements, without substituted 

compliance available. The 

Commission’s policy would apply 

regardless of whether the counterparty 

to the swap is a U.S. person or non-U.S. 

person. This is consistent with the 

Commission’s traditional approach to 

registered FCMs, wherein a person, once 

registered as an FCM, is subject to the 

full panoply of regulations applicable to 

such registrants, without distinctions 

based on whether the counterparties are 

U.S. or non-U.S. counterparties. 

Further, the Commission believes that 

its cross-border policy and 

interpretation with respect to U.S. swap 

dealers and MSPs must be informed by 

the purposes of the Dodd-Frank Act. As 

discussed earlier, the Dodd-Frank Act 

was enacted to reduce systemic risk, 

increase transparency, and promote 

market integrity within the financial 

system by, among other things, 

providing for the comprehensive 

regulation of swap dealers and MSPs. In 

doing so, Congress understood the 

highly integrated nature of the global 

swaps business, with regard to both 

individual firms and the market at large, 

and that risk to U.S. firms and in turn, 

U.S. financial markets may arise 

anywhere in the world. 

In view of the policy goals underlying 

the Dodd-Frank Act swaps reforms, the 

Commission’s view is that U.S. swap 

dealers and MSPs should be fully 

subject to the robust oversight 

contemplated by the Dodd-Frank Act, 

without regard to whether their 

counterparty is a U.S. or non-U.S 

person. These firms are conducting their 

swap dealing business within the 

territory of the United States. That some 

of their business may be directed to 

foreign clients does not diminish the 

Commission’s obligation to ensure that 

swaps between U.S. swap dealers and 

MSPs and their counterparties are 

subject to Dodd-Frank’s financial 

safeguards and transparency 

requirements, to the fullest extent. 

Therefore, in the Commission’s view, 

substituted compliance is incompatible 

with the Commission’s ability to 

effectively discharge its statutory 

responsibilities. 

For substantially the same reasons, 

the Commission believes that full U.S. 

regulation of U.S. swap dealers and 

MSPs, even when they transact swaps 

with non-U.S. counterparties, is a 

reasonable exercise of U.S. jurisdiction 

under the principles of foreign relations 

law. Among the factors supporting this 

exercise of U.S. jurisdiction are the links 

between the U.S. swap dealers and 

MSPs and their swap activities to U.S. 

commerce, and the generally accepted 

importance of regulating the activities of 

these entities both to the United States 

and the international financial 

system.498 In addition, having an agency 

of the U.S. government serve as the 

primary regulator of U.S. entities is 

generally consistent with normal 

expectations and with traditions of the 

international system.499 To the extent 

that other countries have an interest in 

regulating transactions with their 

nationals, the Commission notes that 

the U.S. regulatory scheme for swap 

dealers and MSPs does not preclude 

other countries from imposing their 

regulations if they consider it necessary 

for transactions affecting their 

interests.500 As discussed below, the 

Commission will work with other 

regulators to avoid, and resolve where 

necessary, direct conflicts, as well as to 

reduce unnecessary burdens. The 

Commission observes that very few 

conflicts between the foreign regimes 

and Dodd-Frank Act requirements have 

been identified as part of many 

multilateral and bilateral consultations 

between staff of the CFTC and their 

foreign counterparts. For these 

purposes, conflict means that actions 

required for compliance under one 

jurisdiction’s law are prohibited under 

the other jurisdiction’s law, or 

compliance with the regulations of both 

jurisdictions is otherwise impossible. 

With regard to non-U.S. swap dealers 

or MSPs (including those that are 

affiliates of a U.S. person), the 

Commission’s policy is that these firms 

should be subject to all of the EntityLevel Requirements, but under certain 

circumstances substituted compliance 

should be available (except with regard 

to Large Trader Reporting). The 

Commission’s policy with regard to the 

application of Transaction-Level 

Requirements to non-U.S. swap dealers 

or MSPs, and the availability of 

substituted compliance, depends in part 

on the type of counterparty to the swap 

transaction. 

The foreign branch of a U.S. bank that 

is a swap dealer or MSP is expected to 

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45348 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

501The types of offices the Commission would 

consider to be a ‘‘foreign branch’’ of a U.S. bank, 

and the circumstances in which a swap is with such 

foreign branch, are discussed further in section C, 

supra. 

502See 17 CFR 23.201(b)(3), (4). 

503As noted in the Proposed Guidance, the 

Commission anticipates that non-U.S. swap dealers 

and non-U.S. MSPs will likely have their principal 

swap business in their home jurisdiction. In these 

circumstances, the Commission notes that the home 

regulator would have a primary relationship to the 

swap dealer or MSP, which, coupled with the firmwide focus of the Entity-Level Requirements, 

supports generally making the non-U.S. registrant 

eligible for substituted compliance. Therefore, 

consistent with the Proposed Guidance, the 

Commission believes that it is appropriate to make 

non-U.S. swap dealers and MSPs eligible for 

substituted compliance with respect to Entity-Level 

Requirements in the First Category where the nonU.S. swap dealers or non-U.S. MSPs are subject to 

comparable regulation in their home jurisdiction. 

504 ‘‘Swaps activities’’ are defined in Commission 

regulation 23.600(a)(7). 

comply in full with the Entity-Level 

Requirements, without substituted 

compliance available, because it is not 

a separate legal entity.501 In some 

circumstances the Commission’s policy 

is that a foreign branch of a U.S. swap 

dealer or MSP would be expected to 

comply in full with Category A 

Transaction-Level Requirements where 

its counterparty is a U.S. person. 

However, as further explained below, 

substituted compliance would generally 

be available to a foreign branch of a U.S. 

bank with regard to Category A 

Transaction-Level Requirements where 

the counterparty to a swap transaction 

is a non-U.S. person or a foreign branch 

of a U.S. bank that is a swap dealer or 

MSP. In addition, the Commission’s 

policy with regard to the application of 

the Category B Transaction-Level 

Requirements is explained below. 

Below, the Commission describes its 

policies regarding how Entity-Level and 

Transaction-Level Requirements should 

apply to both U.S. and non-U.S. swap 

dealers and MSPs, and to foreign 

branches of a U.S. banks that are swap 

dealers and MSPs, as well as the 

circumstances under which substituted 

compliance would be available. 

3. Application of the Entity-Level 

Requirements to Swap Dealers and 

MSPs 

In this section, the Commission 

discusses its policy regarding the 

application of the Entity-Level 

Requirements to swap dealers and MSPs 

in cross-border transactions under its 

interpretation of 2(i), as well as the 

circumstances under which such swaps 

would be eligible for substituted 

compliance. 

Section a discusses the Commission’s 

view on the application of Entity-Level 

Requirements to swaps with U.S. swap 

dealers and U.S. MSPs, including 

subsidiaries and affiliates of non-U.S. 

persons, and foreign branches of U.S. 

swap dealers or U.S. MSPs, under CEA 

section 2(i). 

Section b discusses the Commission’s 

view on the application of Entity-Level 

Requirements to swaps with non-U.S. 

swaps dealers and MSPs, including 

subsidiaries and affiliates of U.S. 

persons. 

The Commission’s policy on 

application of the Entity-Level 

Requirements to swap dealers and 

MSPs, as well as substituted 

compliance, is discussed below and 

summarized in Appendix C to this 

Guidance, which should be read in 

conjunction with the rest of the 

Guidance. 

a. To U.S. Swap Dealers and MSPs 

As explained above, U.S. swap 

dealers and U.S. MSPs generally would 

be expected to comply in full with all 

of the Entity-Level Requirements, 

without substituted compliance 

available. The Commission’s policy 

generally would apply regardless of 

whether the counterparty to the swap is 

a U.S. person or non-U.S. person. 

Because under this Guidance the term 

‘‘U.S. person’’ includes corporations, 

partnerships, limited liability 

companies, and other legal entities (as 

discussed above), the foregoing 

interpretation also applies to affiliates of 

non-U.S. persons that are U.S. swap 

dealers or U.S. MSPs. It also applies to 

U.S. banks that are swap dealers or 

MSPs when the swap is with their 

foreign branch. In this case, because a 

foreign branch of a U.S. bank is an 

integral part of the U.S. principal entity 

and has no separate legal existence, and 

the U.S. principal bank is the entity that 

registers as a swap dealer or MSP, under 

the Commission’s interpretation of CEA 

section 2(i), the U.S. bank (principal 

entity) would be the party ultimately 

responsible for compliance with the 

Entity-Level Requirements for the entire 

legal entity. 

b. To Non-U.S. Swap Dealers and MSPs 

Consistent with CEA section 2(i), the 

Commission would expect non-U.S. 

swap dealers and non-U.S. MSPs to 

comply with all of the Entity-Level 

Requirements. This policy also applies 

to foreign affiliates of a U.S. person that 

are independently required to register as 

swap dealers or MSPs and to comply 

with applicable Dodd-Frank Act 

requirements. 

However, in considering whether 

substituted compliance is available to a 

non-U.S. swap dealer or MSP with 

respect to particular Entity-Level 

Requirements, the Commission would 

consider it relevant whether the EntityLevel Requirement is classified in the 

First Category or Second Category (and 

with respect to the Second Category, 

whether the counterparty is a U.S. 

person). 

The Commission recognizes that nonU.S swap dealers or MSPs are likely to 

have their principal swap business in 

their home jurisdiction, and in 

consideration of international comity 

principles, is interpreting CEA section 

2(i) such that such non-U.S swap 

dealers or MSPs generally would be 

eligible for substituted compliance with 

regard to Entity-Level Requirements in 

the First Category (i.e., capital adequacy, 

chief compliance officer, risk 

management, and swap data 

recordkeeping, except certain aspects of 

swap data recordkeeping relating to 

complaints and marketing and sales 

materials 502).503

With respect to Entity-Level 

Requirements in the First Category, as 

noted by commenters on the Proposed 

Guidance, an affiliate of a U.S. swap 

dealer that is guaranteed by such U.S. 

swap dealer (or guaranteed by a U.S.- 

based parent or other affiliate of such 

swap dealer) may under certain 

circumstances be required to register as 

a swap dealer based on its swap dealing 

activity solely with non-U.S. persons, 

including those non-U.S. persons that 

are neither guaranteed affiliates or 

affiliate conduits of U.S. persons. 

Commenters have represented that some 

corporate groups may be required to 

register many of these guaranteed 

affiliates as swap dealers, even though 

such affiliates provide swap dealing 

services only to non-U.S. markets, and 

that many of such guaranteed affiliates 

exist only because the law of the local 

jurisdiction requires that a subsidiary be 

incorporated in the jurisdiction in order 

to enter into swaps with counterparties 

located in such jurisdiction. The 

Commission recognizes that certain 

structural conditions required to comply 

with the regulatory obligations of swap 

dealers may be burdensome for a 

corporate group with many of these 

guaranteed affiliates due to the 

requirement that such obligations be 

complied with at the individual entity 

level (e.g., Commission regulations 

§§ 3.3 (Chief compliance officer), 23.600 

(Risk Management Program for swap 

dealers and major swap participants), 

23.601 (Monitoring of position limits), 

23.602 (Diligent supervision), 23.603 

(Business continuity and disaster 

recovery), and 23.606 (General 

information: Availability for disclosure 

and inspection)). 

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504 ‘‘Swaps activities’’ are defined in Commission 

regulation 23.600(a)(7). 

505See 17 CFR 23.201(b)(3), (4). 

506See id. 

507As the Commission noted in the Proposed 

Guidance, data reported to SDRs is critical to ensure 

that the Commission has a comprehensive and 

accurate picture of swap dealers and MSPs that are 

its registrants, including the gross and net 

counterparty exposures of swaps of all swap dealers 

and MSPs, to the greatest extent possible. Therefore, 

the Commission’s view is that non-U.S. swap 

dealers and non-U.S. MSPs generally should be 

expected to report all of their swaps to a registered 

SDR. At the same time, the Commission recognized 

the interests of foreign jurisdictions with respect to 

swaps between a non-U.S. swap dealer or non-U.S. 

MSP with a non-U.S. counterparty. Therefore, the 

Commission would interpret section 2(i) so that 

swaps between non-U.S. swap dealers or MSPs with 

non-U.S. counterparties generally are eligible for 

substituted compliance with regard to SDR 

Reporting, but only if the Commission has direct 

access to all of the reported swap data elements that 

are stored at a foreign trade repository. 

508 In the Proposed Guidance, the Commission 

included all of the swap data recordkeeping 

requirements of regulations 23.201 and 23.203 in 

the proposed first subcategory of Entity-Level 

Requirements. 77 FR at 41225. In this Guidance, 

swap data recordkeeping related to complaints and 

marketing and sales materials under regulations 

23.201(b)(3) and 23.201(b)(4), respectively, are 

being moved from the First Category to the Second 

Category because the Commission does not believe 

that substituted compliance generally should be 

available for requirements relating to complaints 

and marketing and sales materials where the 

counterparty is a U.S. person. This policy pertains 

equally to swaps with foreign affiliates of a U.S. 

person that are required to independently register 

as swap dealers and to comply with applicable 

Entity-Level Requirements. 

Specifically, the Commission notes 

that Commission regulations §§ 3.3 

(Chief compliance officer), 23.600 (Risk 

Management Program for swap dealers 

and major swap participants), 23.601 

(Monitoring of position limits), 23.602 

(Diligent supervision), 23.603 (Business 

continuity and disaster recovery), and 

23.606 (General information: 

Availability for disclosure and 

inspection) mandate that each swap 

dealer in a corporate group under 

common control individually establish 

policies, procedures, governance 

structures, reporting lines, operational 

units, and systems specified in the 

rules. Thus, the Commission would 

consider relief, subject to appropriate 

conditions and restrictions to be 

determined, that would permit 

guaranteed affiliates in a corporate 

group under common control that do 

not enter into swaps with U.S. persons 

to comply with such regulations by 

establishing consolidated policies, 

procedures, governance structures, 

reporting lines, operational units, and 

systems, thereby increasing operational 

efficiencies and lessening the economic 

burden on these groups with respect to 

their guaranteed affiliates that do not 

directly face U.S. persons when 

engaging in swaps activities.504 The 

Commission notes, however, that any 

such relief would require a consolidated 

program to manage the risks of the 

included guaranteed affiliates on an 

individual, rather than a net, basis. 

The Commission encourages 

interested parties to contact the Director 

of the Division of Swap Dealer and 

Intermediary Oversight to discuss the 

necessary conditions and restrictions of 

appropriate relief. 

The Commission clarifies that, in the 

interest of international comity and for 

the purpose of permitting efficiencies in 

compliance programs, it would remain 

open to considering (or directing its staff 

to consider) relief, subject to appropriate 

conditions and restrictions to be 

determined, that would permit 

guaranteed affiliates in a corporate 

group under common control (that do 

not enter into swaps with U.S. persons 

or U.S. guaranteed affiliates or affiliate 

conduits of U.S. persons) to comply 

with certain of such regulations on a 

consolidated or group basis. The 

Commission notes, however, that any 

such relief would require a consolidated 

program to manage the risks of the 

included guaranteed affiliates on an 

individual, rather than a net, basis. 

With respect to one of the EntityLevel Requirements in the Second 

Category, SDR Reporting (i.e., SDR 

Reporting and swap data recordkeeping 

related to complaints and marketing and 

sales materials),505 the Commission 

interprets CEA section 2(i) such that 

swap dealers or MSPs that are not U.S. 

persons generally would be eligible for 

substituted compliance only with 

respect to swaps where the counterparty 

is a non-U.S. person that is not a 

guaranteed or conduit affiliate. 

With respect to the other Entity-Level 

Requirement in the Second Category 

(i.e., swap data recordkeeping related to 

complaints and marketing and sales 

materials),506 the Commission interprets 

CEA section 2(i) such that swap dealers 

or MSPs that are not U.S. persons 

generally would be eligible for 

substituted compliance only with 

respect to swaps where the counterparty 

is a non-U.S. person. However, as 

explained below, with respect to Large 

Trader Reporting, the Commission’s 

policy would not recognize substituted 

compliance in place of compliance with 

Large Trader Reporting. 

Specifically, with respect to SDR 

Reporting, the Commission interprets 

CEA section 2(i) such that substituted 

compliance may be available to nonU.S. swap dealers and non-U.S. MSPs 

(whether or not such swap dealers or 

MSPs are affiliates of or are guaranteed 

by U.S. persons) for swaps with nonU.S. counterparties, provided that the 

Commission has direct access 

(including electronic access) to the 

relevant swap data that is stored at the 

foreign trade repository. The 

Commission believes that this ensures 

that the Commission will have access to 

information that is critical to its 

oversight of these entities even where 

substituted compliance with regard to 

SDR Reporting would be applicable 

under this Guidance.507 However, the 

Commission interprets section 2(i) as 

applied to these requirements such that 

substituted compliance generally would 

not be available for non-U.S. swap 

dealers and non-U.S. MSPs (whether or 

not such swap dealers or MSPs are 

guaranteed by U.S. persons) with 

respect to swaps with U.S. 

counterparties. The Commission 

believes that in general, application of 

these requirements, without eligibility 

for substituted compliance, is 

appropriate given its strong supervisory 

interest in a swap between a registered 

swap dealer or MSP and a U.S. 

counterparty. 

However, with regard to the SDR 

reporting requirements, for the future, 

the Commission has agreed to continue 

to work collaboratively and to consider 

any unforeseen implementation effects 

that might arise in the application of our 

respective rules. The Commission will 

continue discussions with other 

international partners with a view to 

establishing a more generalized system 

that would allow, on the basis of these 

countries’ implementation of the G–20 

commitments, an extension of the 

treatment the EU and the CFTC will 

grant to each other. 

With regard to certain aspects of swap 

data recordkeeping that relate to 

complaints and marketing and sales 

materials, the Commission interprets 

CEA section 2(i) such that non-U.S. 

swap dealers or non-U.S. MSPs 

generally would be eligible for 

substituted compliance with respect to 

swaps with non-U.S. counterparties.508

To the extent that swap data reported 

to a foreign trade repository would 

include data regarding the physical 

commodity swaps covered by Large 

Trader Reporting, the Commission— 

even if provided with direct access to 

such data—would still likely be 

required to convert it to ‘‘futures 

equivalent’’ positional data in order to 

render it comparable to the data 

obtained through Large Trader 

Reporting, which contemplates 

conversion by the entity required to 

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509Large Trader Reporting provides the 

Commission with data regarding large positions in 

swaps that are linked, directly or indirectly, to a 

discrete list of U.S.-listed physical commodity 

futures contracts, in order to enable the 

Commission to implement and conduct effective 

surveillance of these economically equivalent 

swaps and futures. To facilitate surveillance efforts 

and the monitoring of trading across the swaps and 

futures markets, swaps positions must be converted 

to equivalent positions of the related U.S. futures 

contract (‘‘futures equivalents’’) for reporting 

purposes; reportable thresholds are also defined in 

terms of ‘‘futures equivalents.’’ 

510Some of the Transaction-Level and EntityLevel Requirements also are applicable to market 

participants that are not swap dealers or MSPs, 

which are referred to herein as non-registrants. See 

section H, infra, for a discussion of the 

Commission’s interpretation of how these 

requirements would apply to non-registrants under 

CEA section 2(i). 

511The categorization of Transaction-Level 

Requirements into Categories A and B is discussed 

in section E, supra. See Appendix B for a 

descriptive list of the Category A and Category B 

requirements and Appendix D for a table 

summarizing the application of the Category A 

Transaction-Level Requirements to Swap Dealers 

and MSPs. 

512See the Proposed Guidance, 77 FR 1218. 

513Consistent with the foregoing rationale, the 

Commission takes the view that a U.S. branch of a 

non-U.S. swap dealer or MSP would be subject to 

Transaction-Level requirements, without 

substituted compliance available. As discussed 

above, a branch does not have a separate legal 

identity apart from its principal entity. Therefore, 

the Commission considers a U.S. branch of a nonU.S. swap dealer or non-U.S. MSP to be a non-U.S. 

person (just as the Commission considers a foreign 

branch of a U.S. person to be a U.S. person). 

Nevertheless, the Commission also recognizes its 

strong supervisory interest in regulating the dealing 

activities that occur with the United States, 

irrespective of the counterparty (just as the 

Commission allows for substituted compliance for 

foreign branches in certain instances to take into 

account the strong supervisory interest of local 

regulators). 

report data to the Commission.509 Given 

that Large Trader Reporting is intended 

to enable the Commission, in a prompt 

and efficient manner, to identify 

significant traders in the covered 

physical commodity swaps and to 

collect data on their trading activity in 

order to reconstruct market events, the 

time and resources expended by the 

Commission in conversion could 

significantly impede its market 

surveillance efforts. 

The Commission notes further that its 

interpretation of CEA section 2(i) to 

permit substituted compliance with 

comparable and comprehensive regimes 

in certain circumstances recognizes the 

interests of foreign jurisdictions with 

respect to swaps between non-U.S. 

persons. Large Trader Reporting, 

however, reflects a very specific interest 

of the Commission in conducting 

effective surveillance of markets in 

swaps that have been determined to be 

economically equivalent to certain U.S.- 

listed physical commodity futures 

contracts. In light of this specific 

Commission interest—which is reflected 

in the particularized scope and 

methodology of Large Trader 

Reporting—and in light of the 

anticipated impediments to obtaining 

directly comparable positional data 

through any foreign swap data reporting 

regime, the Commission’s policy would 

not recognize substituted compliance in 

place of compliance with Large Trader 

Reporting. 

4. Application of the ‘‘Category A’’ 

Transaction-Level Requirements to 

Swap Dealers and MSPs 

This section discusses the 

Commission’s guidance on the 

application of the Category A 

Transaction Level Requirements to the 

parties to a swap where one of the 

parties is a registered swap dealer or 

MSP,510 including when substituted 

compliance may be available to various 

types of counterparties. 

As noted above, the Category A 

Transaction Level Requirements 

include: (1) Required clearing and swap 

processing; (2) margining and 

segregation requirements for uncleared 

swaps; (3) trade execution; (4); swap 

trading relationship documentation; (5) 

portfolio reconciliation and 

compression; (6) real-time public 

reporting; (7) trade confirmation; and (8) 

daily trading records.511

The Commission’s policy on 

application of the Category A 

Transaction-Level Requirements is 

summarized in Appendix D to this 

Guidance, which should be read in 

conjunction with the rest of the 

Guidance. 

a. Swaps With U.S. Swap Dealers and 

MSPs 

As explained above, where one of the 

counterparties to a swap is a U.S. swap 

dealer or U.S. MSP, under the 

Commission’s interpretation of CEA 

section 2(i), the Commission would 

generally expect the parties to the swap 

to comply with Category A TransactionLevel Requirements with respect to the 

transaction, without regard to whether 

the other counterparty to the swap is a 

U.S. person or a non-U.S. person. 

Because the Commission interprets 

section 2(i) so that the term ‘‘U.S. 

person’’ would include any legal entity 

organized or incorporated under the 

laws of the United States or having its 

principal place of business in the 

United States, this interpretation also 

would apply where one of the parties to 

the swap is a U.S. swap dealer or U.S. 

MSP that is an affiliate of a non-U.S. 

person.512 In addition, because the 

Commission considers a foreign branch 

of a U.S. person to be a part of the U.S. 

person, the foregoing interpretation also 

applies to swaps with foreign branches 

of a U.S. bank that is a swap dealer or 

MSP (although in some circumstances 

substituted compliance may be available 

as explained below). 

Further, as explained above, with 

regard to substituted compliance, where 

one of the counterparties to a swap is a 

U.S. swap dealer or U.S. MSP (including 

those that are affiliates of a non-U.S. 

person), other than a foreign branch of 

a U.S. bank that is a swap dealer or 

MSP, the Commission’s policy is that 

substituted compliance generally would 

not be available for the Category A 

Transaction-Level Requirements, 

without regard to whether the other 

counterparty is a U.S. person or a nonU.S. person. The Commission has a 

strong supervisory interest in ensuring 

that the Category A Transaction-Level 

Requirements apply to swaps with a 

U.S. swap dealer or MSP.513

Similarly, under the Commission’s 

interpretation of 2(i), where a swap is 

between a foreign branch of a U.S. bank 

that is a swap dealer or MSP, on the one 

hand, and a U.S. person on the other, 

the Commission’s policy is that 

substituted compliance generally would 

not be available with respect to the 

Category A Transaction-Level 

Requirements. In this case, the 

Commission also has a strong 

supervisory interest in ensuring that the 

Category A Transaction-Level 

Requirements fully apply to the 

transaction because it views the swap 

transaction as being between two U.S. 

persons. The Commission believes that 

this approach is appropriate in light of 

the Commission’s strong supervisory 

interests in entities that are part or an 

extension of a U.S. swap dealer or U.S. 

MSP. 

However, where a swap is between 

two foreign branches of U.S. banks that 

are both swap dealers or MSPs, the 

Commission believes that the interests 

of foreign regulators in applying their 

transaction-level requirements to a swap 

taking place in their jurisdiction, 

together with the fact that foreign 

branches of U.S. swap dealers or U.S. 

MSPs are subject generally to direct or 

indirect oversight by U.S. regulators, 

weigh in favor of allowing substituted 

compliance with comparable and 

comprehensive foreign regulatory 

requirements (to the extent applicable). 

In addition, where a swap is between 

the foreign branch of a U.S. bank that is 

a swap dealer or MSP, on the one hand, 

and a non-U.S. person on the other 

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514Market participants or regulators in all of these 

jurisdictions have submitted requests for 

Substituted Compliance Determinations. 

515Under the Commission’s futures regulatory 

regime, any person located outside the U.S. that 

seeks to serve as an intermediary to U.S. persons 

trading on a U.S. designated contract market or in 

foreign futures and option contracts is required to 

register in the appropriate category and comply 

with related regulations, absent the availability of 

an exemption from registration (e.g., relief pursuant 

to Commission regulation 30.10 in the foreign 

futures and option context).’’ See, e.g., Commission 

regulation 30.4. 

516However, non-U.S. swap dealers and MSPs 

must satisfy the daily trading record requirement 

found in Commission regulation 23.202(a)(1). 

517Pursuant to Commission regulations 37.702 

and 38.601, each SEF and DCM must coordinate 

with each DCO to which it submits transactions for 

clearing in the development of rules and procedures 

to facilitate prompt and efficient transaction 

processing to meet the requirements of Commission 

regulation 39.12(b)(7). Commission regulation 

39.12(b)(7)(ii) requires a DCO to accept or reject 

swaps executed on a SEF or DCM for clearing ‘‘as 

quickly after execution as would be technologically 

practicable if fully automated systems were used.’’ 

See also 17 CFR 23.506(a); 39.12(b)(7)(iii); Final 

Customer Documentation Rules, 77 FR at 21306– 

21310. As stated in the Final Customer 

Documentation Rules, these rules, taken as a whole, 

‘‘require SEFs, DCMs, swap dealers, MSPs, and 

DCOs to coordinate in order to facilitate real time 

acceptance or rejection of trades for clearing.’’ Id. 

at 21296. 

518CEA section 2(h)(8)(A) provides that 

transactions in swaps subject to the trade execution 

mandate must be executed on a registered DCM or 

SEF, or a SEF that has been exempted from 

registration. The Commission clarifies that the 

trading mandate under CEA section 2(h)(8)(A) is 

satisfied by trading on a registered DCM or SEF or 

a SEF that has been exempted from registration. 

519Parties that execute a swap transaction on a 

DCM or SEF meet their real-time public reporting 

obligations by operation of a set of Commission 

regulations that essentially delegate the obligations 

to the DCM or SEF on which the transaction was 

executed, and the SDR to which the DCM or SEF 

reports the transaction. Specifically, Commission 

regulation 43.3(a)(2) provides that a party to a 

publicly reportable swap transaction satisfies its 

real-time reporting obligations by executing a 

publicly reportable swap transaction on or pursuant 

to the rules of a registered SEF or DCM. In turn, 

Commission regulation 43.3(b)(1) requires a SEF or 

DCM to transmit swap transaction and pricing data 

to a registered SDR, as soon as technically 

practicable after the publicly reportable swap 

transaction has been executed on or pursuant to the 

rules of such trading platform or facility. Finally, 

Commission regulation 43.3(b)(2) requires a 

registered SDR to ensure that swap transaction and 

pricing data is publicly disseminated, as soon as 

technologically practicable after such data is 

received from a registered SEF or DCM. 

520See Commission regulation 23.501(a)(4)(i) 

(‘‘Any swap transaction executed on a swap 

execution facility or designated contract market 

shall be deemed to satisfy the requirements of this 

section, provided that the rules of the swap 

execution facility or designated contract market 

establish that confirmation of all terms of the 

transactions shall take place at the same time as 

execution’’); 37.6(b); Part 37 SEF Regulations, 78 FR 

at 33585 (‘‘A swap execution facility shall provide 

Continued 

(regardless of whether the non-U.S. 

person is a guaranteed or conduit 

affiliate), as a policy matter, the 

Commission believes that substituted 

compliance should be available (if 

otherwise applicable). In this case, even 

though the Commission considers the 

foreign branch of a U.S. person to be a 

U.S. person, the Commission believes 

that the interests of foreign regulators in 

applying their transaction-level 

requirements to a swap taking place in 

their jurisdiction, together with the fact 

that foreign branches of U.S. swap 

dealers or U.S. MSPs are subject 

generally to direct or indirect oversight 

by U.S. regulators because they are part 

of a U.S. person, may weigh in favor of 

allowing substituted compliance with 

comparable and comprehensive foreign 

regulatory requirements (to the extent 

applicable) where the counterparty to 

the foreign branch is a non-U.S. person. 

In a modification to the Proposed 

Guidance, where a swap between the 

foreign branch of a U.S. swap dealer or 

U.S. MSP and a non-U.S. person (that is 

not a guaranteed or conduit affiliate) 

takes place in a foreign jurisdiction 

other than Australia, Canada, the 

European Union, Hong Kong, Japan, or 

Switzerland,514 the Commission’s 

policy is to interpret CEA section 2(i) so 

that counterparties may comply with 

the transaction-level requirements 

applicable to entities domiciled or doing 

business in the foreign jurisdiction 

where the foreign branch is located, 

rather than the Transaction-Level 

Requirements that would otherwise be 

applicable, if two elements are present. 

First, the aggregate notional value 

(expressed in U.S. dollars and measured 

on a quarterly basis) of the swaps of all 

U.S. swap dealer’s foreign branches in 

foreign jurisdictions other than 

Australia, Canada, the European Union, 

Hong Kong, Japan, or Switzerland does 

not exceed five percent of the aggregate 

notional value (expressed in U.S. dollars 

and measured on a quarterly basis) of all 

of the swaps of the U.S. swap dealer. 

Second, the U.S. person maintains 

records with supporting information to 

verify that the first element is present, 

as well as to identify, define, and 

address any significant risk that may 

arise from the non-application of the 

Transaction-Level Requirements. The 

Commission believes this policy is 

appropriate because U.S. swap dealers’ 

dealing activities through branches or 

agencies in jurisdictions other than the 

six jurisdictions referenced above, 

though not significant in many cases, 

may be nevertheless an integral element 

of their global business. The 

Commission notes that this exception is 

not available in the six jurisdictions 

referenced above because the 

Commission has received, or expects to 

receive in the near term, a request for 

substituted compliance determinations 

for transactions in these jurisdictions. 

Although the foreign branch of a U.S. 

registrant would not register separately 

as a swap dealer or MSP, the 

Commission interprets 2(i) in a manner 

that would permit the U.S. registrant to 

task its foreign branch to fulfill its 

regulatory obligations with respect to 

the Category A Transaction-Level 

Requirements. The Commission would 

generally consider compliance by the 

foreign branch to constitute compliance 

with these Transaction-Level 

Requirements. However, under the 

Commission’s interpretation of 2(i), the 

U.S. person (principal entity) would 

remain responsible for compliance with 

the Category A Transaction-Level 

Requirements. 

b. Swaps With Non-U.S. Swap Dealers 

and Non-U.S. MSPs 

Under the Commission’s 

interpretation of CEA section 2(i), where 

a swap is between a non-U.S. swap 

dealer or non-U.S. MSP (including an 

affiliate of a U.S. person), on the one 

hand, and a U.S. person (other than a 

foreign branch of a U.S. swap dealer or 

MSP), on the other, the Commission 

would generally expect the parties to 

comply with Category A TransactionLevel Requirements with respect to the 

transaction.515

The Commission notes, however, that 

where a swap is executed anonymously 

between any non-U.S. person, whether 

a swap dealer or an MSP, and a U.S. 

person (other than a foreign branch of a 

U.S. swap dealer or MSP) on a 

registered DCM or SEF and cleared, the 

non-U.S. person will generally be 

considered to have satisfied each of the 

eight Category A Transaction-Level 

Requirements that apply to such a swap 

transaction as a consequence of being so 

executed on a DCM or SEF. Thus, 

neither the non-U.S. person (nor its U.S. 

person counterparty) will need to take 

any further steps to comply with the 

Category A Transaction-Level 

Requirements in connection with such a 

transaction.516

In making this determination, the 

Commission observes that where a 

cleared swap transaction is executed 

anonymously on a registered DCM or 

SEF, certain independent requirements 

that apply to DCM and SEF transactions 

generally, pursuant to the CEA or the 

Commission’s regulations, will ensure 

that four of the eight Category A 

Transaction-Level Requirements will be 

met for such transactions—required 

clearing and swap processing,517 trade 

execution,518 real-time public 

reporting,519 and trade confirmation.520

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each counterparty to a transaction that is entered on 

or pursuant to the rules of the swap execution 

facility with a written record of all of the terms of 

the transaction which shall legally supersede any 

previous agreement and serve as confirmation of the 

transaction. The confirmation of all terms shall take 

place at the same time as execution . . . ’’). 521See 17 CFR 23.504(a)(1) (‘‘The requirements of 

this section [swap trading relationship 

documentation] shall not apply to . . . swaps 

executed on a board of trade designated as a 

contract market under section 5 of the Act or to 

swaps executed anonymously on a swap execution 

facility under section 5h of the Act, provided that 

such swaps are cleared by a derivatives clearing 

organization . . .’’); 23.502(d) (‘‘Nothing in this 

section [portfolio reconciliation] shall apply to a 

swap that is cleared by a derivatives clearing 

organization’’); 23.503(c) (‘‘Nothing in this section 

[portfolio compression] shall apply to a swap that 

is cleared by a derivatives clearing organization.’’). 

522See 17 CFR 23.202. 

523The Commission is of the view that CEA 

section 2(i) should not be interpreted to apply the 

daily trading records requirements, with the 

exception of those found in Commission regulation 

23.202(a)(1). 

524However, a non-U.S. swap dealer or non-U.S. 

MSP must satisfy the daily trading record 

requirement found in Commission regulation 

23.202(a)(1). 

525As discussed above, pursuant to Commission 

regulation 48.7(c)(1)(ii), all contracts, including 

swaps, made available in the U.S. by a registered 

FBOT must be cleared. The clearing organization 

must be either a DCO or must observe international 

clearing standards: The RCCP or the successor 

standards, PFMI. 

526See discussion of clearing at section IV.F.6, 

supra. The Commission clarifies that the trading 

mandate under CEA section 2(h)(8)(A) is satisfied 

by trading on a registered FBOT. 

527Pursuant to Commission regulation 48.8(a)(9), 

the registered FBOT must ensure that all transaction 

data relating to each swap transaction, including 

price and volume, are reported as soon as 

technologically practicable after execution of the 

swap transaction to a SDR that is either registered 

with the Commission or has an information sharing 

arrangement with the Commission. While 

Commission regulation 43(b)(2) requires that an 

SDR ensure that swap transaction and pricing data 

is publicly disseminated as soon as technologically 

practicable after such data is received from a 

registered SEF, DCM or reporting party, it does not 

specifically require public dissemination of swap 

transaction and pricing data from the FBOT. 

Therefore, in order for the FBOT to ensure that the 

real-time public reporting requirement is satisfied, 

the FBOT must either report the data to the public 

itself or enter into an arrangement with the SDR to 

which the data are reported pursuant to which the 

SDR agrees to publicly disseminate the data as soon 

as technologically practicable. 

528The Commission is of the view that CEA 

section 2(i) should not be interpreted to apply the 

daily trading records requirements, with the 

exception of those found in Commission regulation 

23.202(a)(1). 

529Where one of the parties to the swap is a 

conduit affiliate, the Commission would generally 

expect the parties to the swap only to comply with 

(to the extent that the Inter-Affiliate Exemption is 

elected), the conditions of the Inter-Affiliate 

Exemption, including the treatment of outwardfacing swaps condition in Commission regulation 

50.52(b)(4)(i). In addition, the part 43 real-time 

reporting requirements must be satisfied. 

For a combination of reasons, the 

Commission also believes that the four 

remaining Transaction-Level 

Requirements do not, or should not, 

apply to cleared, anonymous DCM or 

SEF transactions. So, for instance, the 

fact that the DCM or SEF swap 

transaction will be cleared, obviates the 

need for margining or segregation 

requirements applicable to uncleared 

swaps. Two other Category A 

Transaction-Level Requirements—swap 

trading relationship documentation and 

portfolio reconciliation and 

compression—would not apply because 

the Commission regulations that 

establish those requirements make clear 

that they do not apply to cleared DCM 

or SEF transaction.521 The last 

requirement—the daily trading records 

requirement 522—would only be 

applicable to the non-U.S. swap dealer 

and only with regard to pre-trade 

execution swaps. However, because the 

non-U.S. swap dealer will have no 

information about its counterparty 

where the swap is executed 

anonymously, the Commission is of the 

view that, as a matter of international 

comity, CEA section 2(i) should not be 

interpreted to apply all of the daily 

trading records requirements to such a 

swap.523

In addition, the Commission is 

interpreting CEA section 2(i) such that, 

where a swap between a non-U.S. 

person, regardless of its swap dealer or 

MSP status, and a U.S. person is 

executed anonymously on an FBOT 

registered with the Commission 

pursuant to part 48 and cleared the nonU.S. person will generally be considered 

to have satisfied the Category A 

Transaction-Level Requirements that 

pertain to such a swap transaction. 

Some of the requirements will be 

satisfied by requirements levied by 

regulation on the FBOT and some will 

be satisfied because a registered FBOT 

is analogous to a DCM and is subject to 

comprehensive supervision and 

regulation in its home country that is 

comparable to that exercised over a 

DCM by the Commission. Thus, neither 

the non-U.S. person (nor its U.S. person 

counterparty) will need to take any 

further steps to satisfy the applicable 

Category A Transaction-Level 

Requirements in connection with such a 

transaction.524

In making this determination, the 

Commission observes that where a 

cleared swap transaction is executed 

anonymously on a registered FBOT, the 

FBOT, similar to a DCM, based on 

certain independent requirements that 

apply to DCM transactions generally 

pursuant to the CEA or the 

Commission’s regulations, will ensure 

that two of the eight Category A 

Transaction-Level Requirements will be 

satisfied for such transactions: Required 

clearing and swap processing 525 and 

trade execution.526 The Commission 

notes that while the real-time reporting 

requirement will be satisfied for cleared 

swaps executed anonymously on a DCM 

by operation of the Commission’s realtime reporting regulations, absent 

further affirmative actions by an FBOT, 

the real-time public reporting 

requirements will not be satisfied 

through FBOT execution alone.527

For a combination of reasons, 

including the fact that the swap will be 

cleared, the Commission also is of the 

view that the remaining TransactionLevel Requirements do not apply to 

such transactions executed on a 

registered FBOT. For instance, the fact 

that the swap will be cleared, as 

required by regulation 48.7(c)(1)(ii), 

renders inapplicable the margining or 

segregation requirements for uncleared 

swaps. As the Commission observed 

above with respect to swaps executed 

anonymously on DCMs, certain of the 

other Category A Transaction-Level 

Requirements would not apply to the 

swap. Consistent with this 

determination, three of the other 

Category A Transaction-Level 

Requirements—swap trading 

relationship documentation, portfolio 

reconciliation and compression and 

trade confirmation—would not apply to 

the swap executed on a registered FBOT 

because the underlying Commission 

regulations themselves do not apply 

those requirements to cleared DCM or 

SEF transactions. The last 

requirement—the daily trading records 

requirement—would only be applicable 

to the non-U.S. swap dealer and only 

with regard to pre-trade execution 

swaps. However, because the non-U.S. 

swap dealer will have no information 

about its counterparty where the swap 

is executed anonymously on a registered 

FBOT, the Commission is of the view 

that, as a matter of international comity, 

CEA section 2(i) should be interpreted 

such that certain of the daily trading 

records requirements also would not 

apply to the swap.528

In addition, for the reasons discussed 

in the next two sections, where a swap 

is between a non-U.S. swap dealer or 

non-U.S. MSP, on the one hand, and a 

non-U.S. person that is a guaranteed or 

conduit affiliate, on the other, under the 

Commission’s interpretation of 2(i), the 

Commission would generally expect the 

parties to comply with the Category A 

Transaction-Level Requirements.529

However, where a swap is between a 

non-U.S. swap dealer or non-U.S. MSP 

(including an affiliate of a U.S. person), 

on the one hand, and a non-U.S. person 

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530Thus, for example, a swap between a 

registered non-U.S. swap dealer and a German 

person would not be subject to Category A 

Transaction-Level Requirements. 

531Where the counterparty to a non-U.S. swap 

dealer or non-U.S. MSP is an international financial 

institution such as the World Bank, the Commission 

also generally would not expect the parties to the 

swap to comply with the Category A TransactionLevel Requirements, even if the principal place of 

business of the international financial institution 

were located in the United States. 

For this purpose, the Commission would consider 

the international financial institutions to be the 

institutions listed as such in the Final Entities 

Rules, 77 FR at 30692 n. 1180, which include the 

International Monetary Fund, International Bank for 

Reconstruction and Development, International 

Development Association, International Finance 

Corporation, Multilateral Investment Guarantee 

Agency, the Inter-American Development Bank, and 

the Inter-American Investment Corporation. Even 

though some or all of these international financial 

institutions may have their principal place of 

business in the United States, the Commission 

would generally not consider the application of the 

Category A Transaction-Level Requirements to be 

warranted, for the reasons of the traditions of the 

international system discussed in the Final Entities 

Rules. 

532See Restatement secs. 403(2)(a) (effect on 

territory of regulating state), 403(2)(c) (importance 

of regulated activity to the regulating state); 403 

cmt. b (weight to be given to reasonableness factors 

depends on circumstances). 

533See No-Action Relief for Registered Swap 

Dealers and Major Swap Participants from Certain 

Requirements under Subpart I of Part 23 of 

Commission Regulations in Connection with 

Uncleared Swaps Subject to Risk Mitigation 

Techniques under EMIR, CFTC Letter No. 13–45 

(Jul. 11, 2013) (‘‘Risk Mitigation Letter’’). 

534The Risk Mitigation Letter provides an 

example of when requirements in a foreign 

jurisdiction would be essentially identical to DoddFrank requirements. See id. 

535See Proposed Guidance, 77 FR 41288. 

that is not a guaranteed or conduit 

affiliate, on the other, under the 

Commission’s interpretation of 2(i), the 

Commission would not expect the 

parties to the swap to comply with the 

Category A Transaction-Level 

Requirements.530 In this case, the 

Commission believes that generally 

there may be a relatively greater 

supervisory interest on the part of 

foreign regulators with respect to 

transactions between two counterparties 

that are non-U.S. persons so that 

application of the Category A 

Transaction-Level Requirements may 

not be warranted.531

With regard to substituted 

compliance, where a swap is between a 

non-U.S. swap dealer or non-U.S. MSP 

(including an affiliate of a U.S. person), 

on the one hand, and a U.S. person 

(other than a foreign branch of a U.S. 

bank swap dealer or U.S. MSP), on the 

other, the Commission’s policy is that 

substituted compliance would generally 

not be available for the Category A 

Transaction-Level Requirements. The 

Commission believes that this approach 

is appropriate in this case because the 

Commission has a strong interest in 

ensuring that the swap fully complies 

with the Category A Transaction Level 

Requirements, without substituted 

compliance. A number of related 

reasons support this conclusion. As 

discussed above, a major purpose of 

Title VII is to control the potential harm 

to U.S. markets that can arise from risks 

that are magnified or transferred 

between parties via swaps. As also 

discussed above, swaps between U.S. 

persons and non-U.S. persons 

inherently raise the possibility of such 

risk magnification and transfer. The 

Category A Transaction Level 

Requirements are designed to constrain 

such risk magnification and transfer. 

The United States thus has a strong 

interest in applying the Dodd-Frank Act 

requirements, rather than substitute 

requirements adopted by non-U.S. 

authorities, to swaps with U.S. persons. 

Exercise of U.S. jurisdiction with 

respect to the Category A Transaction 

Level Requirements over swaps between 

U.S. persons and non-U.S. persons is a 

reasonable exercise of jurisdiction 

because of the strong U.S. interest in 

minimizing the potential risks that may 

flow to the U.S. economy as a result of 

such swaps.532

Even though substituted compliance 

is not available with respect to swaps 

between a non-U.S. swap dealer or nonU.S. MSP, on the one hand, and a U.S. 

person (other than a foreign branch of a 

U.S. bank swap dealer or U.S. MSP), on 

the other, a market participant would be 

deemed in compliance with the relevant 

Dodd-Frank requirements where it 

complies with requirements in its home 

jurisdiction that are essentially identical 

to the Dodd-Frank requirements. 

Whether the home jurisdiction’s 

requirements are essentially identical to 

the corollary Dodd-Frank requirements 

would be evaluated on a provision-byprovision basis. The Commission 

intends that a finding of essentially 

identical generally would be made 

through Commission action but in 

appropriate cases could be made 

through staff no-action. 

Based on the foregoing principles, the 

Commission staff issued a no-action 

letter related to risk mitigation.533 The 

Commission staff found that the 

Commission and the EU have 

essentially identical rules in important 

areas of risk mitigation for the largest 

counterparty swap market participants. 

Specifically, the Commission staff 

determined that under the European 

Market Infrastructure Regulation 

(EMIR), the EU has adopted risk 

mitigation rules that are essentially 

identical to certain provisions of the 

Commission’s business conduct 

standards for swap dealers and major 

swap participants. In areas such as 

confirmation, portfolio reconciliation, 

portfolio compression, valuation, and 

dispute resolution, the Commission staff 

found that the respective regimes are 

essentially identical. The Commission 

staff determined that where a swap/OTC 

derivative is subject to concurrent 

jurisdiction under US and EU risk 

mitigation rules, compliance under 

EMIR will achieve compliance with the 

relevant Commission rules because they 

are essentially identical.534

However, where the swap is between 

a non-U.S. swap dealer or non-U.S. MSP 

(including an affiliate of a U.S. person) 

and a foreign branch of a U.S. bank that 

is a swap dealer or MSP, as a policy 

matter, the Commission believes that 

substituted compliance should be 

available for the Category A 

Transaction-Level Requirements, to the 

extent applicable. Under substituted 

compliance, a counterparty can choose 

to follow a foreign jurisdiction’s rules 

even though those rules are not 

essentially identical, provided that the 

regime is comparable and 

comprehensive. The Commission 

believes that international comity 

principles support taking this more 

flexible approach where the transaction, 

although it involves a U.S. person, takes 

place in a foreign jurisdiction. 

In addition, where a swap is between 

a non-U.S. swap dealer or non-U.S. MSP 

(including an affiliate of a U.S. person), 

on the one hand, and a non-U.S. person 

that is a guaranteed or conduit affiliate, 

on the other, substituted compliance 

may be available to satisfy the Category 

A Transaction Level Requirements, to 

the extent applicable, as discussed in 

the next two sections. 

c. Swaps With a Non-U.S. Person 

Guaranteed by a U.S. Person 

i. Proposed Guidance 

In the Proposed Guidance, with 

respect to swaps between a non-U.S. 

swap dealer or non-U.S. MSP, on the 

one hand, and a non-U.S. counterparty 

on the other hand, the Commission 

proposed to interpret CEA section 2(i) 

such that a non-U.S. swap dealer or 

non-U.S. MSP would be expected to 

comply with the Category A 

Transaction-Level Requirements for 

swaps where the non-U.S. 

counterparty’s performance is 

guaranteed, or otherwise supported by, 

a U.S. person.535 In consideration of 

international comity principles, the 

Commission further proposed to 

interpret CEA section 2(i) so as to 

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536See id. 

537See IATP (Aug. 27, 2012) at 3–4. 

538See AFR (Aug. 14, 2012) at 1–2. 

539See Australian Bankers (Aug. 27, 2012) at A8. 

540See Sumitomo (Aug. 24, 2012) at 3. Sumitomo 

added that, at a minimum, the Commission should 

exclude swaps obligations in excess of a capped 

guaranty. Id. 

541See CEWG (Aug. 27, 2012) at 6–7. 

542See IIB (Aug. 27, 2012) at 14–15. 

543 Id. at 15–16. 

544See Citi (Aug. 27, 2012) at 4–9. 

545See IIB (Aug. 27, 2012) at 20. 

546 Id. See also Sullivan & Cromwell (Aug. 13, 

2012) at 7 (‘‘the counterparty should be considered 

a non-U.S. person for purposes of the regulatory 

requirements, provided that the transactions are not 

being conducted by the non-U.S. persons as an 

evasion’’); The Clearing House (Aug. 27, 2012) at 17 

(stating that ‘‘[a]ny guaranteed entity of a U.S. 

Person should only include ‘shell’ entities that have 

transferred substantially all of their market and 

credit risk to a U.S. Person (excluding non-financial 

entities) or any entities created to evade U.S. swaps 

rules.’’); Citi (Aug. 27, 2012) at 4–9 (‘‘. . . Title VII 

should not apply to non-U.S. subsidiaries on the 

basis of guarantees . . . where such subsidiaries are 

bona fide companies.’’). 

547See Sullivan & Cromwell (Aug. 13, 2012) at 15. 

548See IIB (Aug. 27, 2012) at 17–18. 

549 Id. at 15–16, 18–19. 

550 Id. at 4. 

551 Id. at 16–17. 

552 Id. at 15–16. 

553See End Users Coalition (Aug. 27, 2012) at 3 

(Commission’s proposal may disadvantage non-U.S. 

affiliates of U.S. end-users whose non-U.S. 

counterparties may require guarantees to do 

business); Citi (Aug. 27, 2012) at 4–9 (applying 

Transaction-Level Rules in these circumstances 

would place U.S. multinationals at a severe 

competitive disadvantage relative to foreign-based 

corporations, as their subsidiaries abroad would 

have to either forgo parent support or comply with 

different transaction-level rules than those of the 

local market); IIB (Aug. 27, 2012) at 18 (non-U.S. 

persons that register as swap dealers due to their 

trading with U.S. persons would be disadvantaged 

vis-a`-vis non-U.S. firms that do not have a U.S. 

permit substituted compliance for these 

Transaction-Level Requirements. 

The Commission explained that it 

proposed to interpret section 2(i) in this 

manner because, where a non-U.S. 

counterparty’s swaps obligations are 

guaranteed by a U.S. person, the risk of 

non-performance by the counterparty 

rests with the U.S. person that is the 

guarantor of performance or payment. If 

the non-U.S. person defaults on its 

obligations under the swaps, then the 

U.S. person guarantor will be held 

responsible (or would bear the cost) to 

settle those obligations. In 

circumstances in which a U.S. person 

ultimately bears the risk of nonperformance of a counterparty to a swap 

with a non-U.S. swap dealer or non-U.S. 

MSP, the Commission noted its strong 

regulatory interest in performance by 

both parties to the swap, and hence 

proposed to apply these TransactionLevel Requirements.536

ii. Comments 

Some commenters concurred in the 

Commission’s emphasis on a guarantee 

by a U.S. person as an interpretive 

guidepost. IATP, for example, stated 

that ‘‘the U.S. person’s guarantee is a 

crucial criterion for the Commission’s 

determination of whether a non-U.S. 

person would be subject to compliance 

with Dodd-Frank or whether substituted 

compliance would be appropriate.’’ 537

Similarly, AFR, in commenting on the 

Proposed Order, expressed concern 

about U.S. taxpayer exposure to ‘‘foreign 

affiliates of U.S. banks whose liabilities 

are guaranteed (implicitly or explicitly) 

by the parent company.’’ 538

Other commenters, by contrast, stated 

that: (1) The Transaction-Level 

Requirements should never apply to 

swaps between counterparties that are 

both non-U.S. persons; 539 (2) the 

Commission should exclude the swap 

dealing transactions of a non-U.S. 

person where the counterparties to the 

swaps are, themselves, non-U.S. 

persons, irrespective of whether such 

counterparties’ obligations are 

guaranteed by the U.S. person; 540 and 

(3) section 2(i) does not provide a legal 

basis for jurisdiction over a swap 

between non-U.S. persons based on a 

guaranty by a U.S. person because 

guarantees ‘‘do not alter the location of 

activity.’’ 541 In a similar vein, IIB stated 

that the Commission’s proposed 

treatment of guarantees based on its 

concern that the U.S. guarantor is 

exposed to risks incurred by one of its 

non-U.S. affiliates, ‘‘is unduly 

broad.’’ 542

IIB explained that guarantees are a 

very common way for U.S. 

multinational corporations (both 

financial and non-financial) to provide 

credit support for their non-U.S. 

subsidiaries. According to IIB, parent 

credit support enables these subsidiaries 

to hedge their risks cost-effectively in 

the markets in which they operate, 

thereby reducing the cost of risk 

management and therefore the costs of 

operations.543 Citi noted that ordinary 

course parent support commitments, 

general payment guarantees and capital 

maintenance commitments are often 

necessary to enter foreign banking 

markets. It added that U.S. 

multinationals also guarantee 

obligations of local subsidiaries so that 

their subsidiaries can effectively hedge 

risks in local markets.544

IIB argued that these arrangements 

‘‘are in stark contrast to circumstances 

where an unregulated foreign ‘shell’ 

affiliate is used for purposes of entering 

into significant swap dealing activity 

outside the scope of Dodd-Frank and 

systematically transferring the market 

and credit risks arising from the activity 

to a U.S. affiliate.’’ 545 Accordingly, IIB 

maintained that application of 

Transaction-Level Requirements where 

a non-U.S. counterparty to a non-U.S. 

swap dealer or non-U.S. MSP is 

guaranteed by a U.S. person is 

unnecessary because the Commission 

already has adopted an anti-evasion rule 

to address such schemes.546

Commenters stated that in many 

instances, the Commission’s concerns 

about a guarantee by a U.S. person can 

be addressed as a safety and soundness 

matter by the Federal Reserve Board 

when it supervises both the guarantor 

and its subsidiaries; further, where the 

U.S. providing a guarantee is itself a 

swap dealer or MSP, it also will be 

subject to Title VII requirements.547 In 

a related vein, the Commission was 

urged to adopt an exception from its 

proposed treatment of a non-U.S. 

counterparty with a guarantee from a 

U.S. person if either: (1) The 

counterparty is subject to U.S. capital 

requirements or comparable foreign (i.e., 

Basel-compliant) capital requirements; 

or (2) the guarantor is a U.S. bank 

holding company.548

IIB also stated that the Commission 

should tie the application of Title VII 

requirements to the cross-border 

activities of U.S.-guaranteed foreign 

subsidiaries to the significance of the 

risk to the United States arising from the 

underlying guaranteed activity—that is, 

where the existence of a guarantee gives 

rise to direct and significant risks to the 

United States.549 Otherwise, IIB stated, 

‘‘the level of risk to the United States is 

too contingent, remote or low to justify 

application of U.S. regulation in the face 

of strong and more direct non-U.S. 

regulatory interests.’’ 550 Under such an 

approach, IIB stated, the Commission 

should adopt an exception from its 

proposed treatment of a non-U.S. 

counterparty with a guarantee from a 

U.S. person if the non-U.S. counterparty 

is not a financial entity and is entering 

into the transaction for hedging or risk 

mitigation purposes.551 More 

particularly, IIB posited, if the level of 

the non-U.S. counterparty’s swap 

activity is insubstantial in relation to its 

net equity, or if the aggregate potential 

liability of the U.S. guarantor with 

respect to the non-U.S. counterparty’s 

swap activity is insubstantial in relation 

to the net equity of the guarantor, then 

the risk to the United States will not be 

significant and Transaction-Level 

Requirements should not be applied.552

Many of the comments on this topic 

stated that the Commission’s proposal 

in this regard would result in adverse 

competitive consequences.553 Others, 

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swap dealing business because only the former 

would be obligated to comply with the TransactionLevel Requirements for swaps with U.S.-guaranteed 

counterparties); Sullivan & Cromwell (Aug. 13, 

2012) at 6 (Title VII should not apply to the nonU.S. operations and activities of an entity simply 

because it has a U.S. parent that provides a 

guarantee because this would impose duplicative 

regulation and unnecessary costs on non-U.S. 

operations that are already subject to local foreign 

rules and regulations). 

554See Hong Kong Banks (Aug. 27, 2012) at 4– 

5. 

555See, e.g., ISDA (Aug. 10, 2012) at 10. 

556See Citi (Aug. 27, 2012) at 4–9. 

557 Id. See also CEWG (Aug. 27, 2012) at 4–5 

(recommending that the Commission ‘‘undertake a 

more thorough regulatory analysis with respect to 

guarantees of swaps obligations’’). 

558See Hong Kong Banks at 4–5. 

559See CEWG (Aug. 27, 2012) at 4–5. 

560See Final Swap Definition, 77 FR at 48225– 

48227. The interpretation herein applies only to a 

swap that is not a security-based swap or a mixed 

swap. 

561 Id. at 48226 n.186. 

562See Final Entities Rules, 77 FR at 30689 (‘‘[A]n 

entity’s swap or security-based swaps positions in 

general would be attributed to a parent, other 

affiliate or guarantor for purposes of major 

participant analysis to the extent that counterparties 

to those positions would have recourse to that other 

entity in connection with the position. Positions 

would not be attributed in the absence of 

recourse.’’). 

563The Commission agrees with commenters who 

stated that Transaction-Level Requirements should 

not apply if a non-U.S. swap dealer or non-U.S. 

MSP relies on a written representation by a nonU.S. counterparty that its obligations under the 

swap are not guaranteed with recourse by a U.S. 

person. Such an approach is consistent with 

Commission practice in other contexts such as the 

external business conduct rules. 

though, objected that Transaction-Level 

Requirements should not apply to 

entities guaranteed by U.S. persons 

because non-U.S. counterparties will 

likely be unwilling to agree to the legal 

documents necessary to comply with 

those requirements.554 And others 

stated that the proposed interpretation 

will not achieve the objective of 

mitigating counterparties’ exposure to 

the credit risks of swap dealers because 

the U.S. guarantor’s exposure in this 

scenario is to the credit risk of the 

guaranteed non-U.S. counterparty, not 

to the non-U.S. swap dealer that is 

transacting with that guaranteed nonU.S. counterparty.555

Citi commented that if TransactionLevel Requirements were to be applied 

to swaps of non-U.S. persons whose 

obligations were guaranteed by a U.S. 

person, then U.S.-based firms may be 

forced to remove parent support from 

their overseas subsidiaries in order to 

remain competitive. It argued that this 

would cause significant additional 

capital, resources, and personnel to be 

moved abroad so that these non-U.S. 

subsidiaries could manage swap risk on 

a stand-alone basis which, it averred, 

would fragment and harm the safety and 

soundness of U.S.-based firms, U.S. 

swaps markets, and the U.S. 

economy.556 Accordingly, it urged the 

Commission to further study the issue of 

guarantees before finalizing its crossborder guidance.557

One commenter requested that the 

Commission clarify the scope of a 

‘‘guarantee’’ that can trigger application 

of Transaction-Level Requirements in 

these circumstances.558 Another 

objected to the scope of the term 

‘‘guarantee’’ if it were defined to include 

not only a guarantee of payment or 

performance of swaps obligations, but 

also other formal arrangements to 

support the ability of a person to 

perform its obligations (such as liquidity 

puts and keepwell agreements).559

iii. Commission Guidance 

Under this Guidance, with respect to 

swaps between a non-U.S. swap dealer 

or non-U.S. MSP (including an affiliate 

of a U.S. person) on the one hand, and 

a non-U.S. counterparty on the other 

hand where the non-U.S. counterparty’s 

performance is guaranteed (or otherwise 

supported by) a U.S. person, the 

Commission would generally expect the 

parties to the swap to comply with all 

of the Category A Transaction-Level 

Requirements. The Commission believes 

that this policy is warranted in light of 

the significant regulatory interest in 

managing and reducing the risks to U.S. 

firms, markets and commerce from such 

transactions. Further, this policy is 

based on the Commission’s view that 

the failure to apply Category A 

Transaction-Level Requirements to such 

swaps could leave a significant gap in 

the regulation of risks presented by 

swap activities undertaken by U.S. 

firms. However, as proposed, the 

Commission’s policy contemplates that 

substituted compliance (to the extent 

applicable) could satisfy the Category A 

Transaction-Level Requirements that 

otherwise might apply to such swaps, as 

further discussed below. 

In response to commenters that 

requested clarification of the nature of 

the guarantee of a non-U.S. counterparty 

by a U.S. person that will trigger the 

application of Transaction-Level 

Requirements to swaps with non-U.S. 

swap dealers or non-U.S. MSPs, the 

Commission references the approach set 

forth in the final rule further defining 

the term ‘‘swap,’’ among others.560 That 

is, for this purpose, a guarantee of a 

swap is a collateral promise by a 

guarantor to answer for the debt or 

obligation of a counterparty obligor 

under a swap.561 Thus, to the extent that 

the non-U.S. swap dealer or non-U.S. 

MSP would have recourse to the U.S. 

guarantor in connection with its swaps 

position, the Commission would 

generally expect such non-U.S. swap 

dealer or MSP to comply with the 

Category A Transaction-Level 

Requirements for such a guaranteed 

swap (although substituted compliance 

may satisfy compliance with such 

requirements to the extent it is 

applicable, as discussed above). This 

interpretation also is consistent with the 

interpretation related to the MSP 

definition that the Commission set forth 

in the Final Entities Rules.562

Conversely, where a non-U.S. swap 

dealer or non-U.S. MSP enters into a 

swap with a non-U.S. counterparty that 

does not have a guarantee as so 

described from a U.S. person and is not 

an affiliate conduit, the Commission’s 

view is that the Transaction-Level 

Requirements should not apply.563

Considerations relevant to application 

of the Transaction-Level Requirements 

also relate to persons guaranteeing 

swaps obligations. As noted in the 

proposal, the Transaction-Level 

Requirements with respect to required 

clearing and swap processing, margin 

(and segregation), and portfolio 

reconciliation and compression can 

serve to significantly mitigate risks to 

the swap dealer’s counterparties, and by 

extension, the risk to the U.S. person 

guaranteeing the non-U.S. 

counterparty’s obligations under the 

swap. Other Transaction-Level 

Requirements—trade confirmation, 

swap trading relationship 

documentation, and daily trading 

records—protect the counterparties to 

the swap, and thus also protect a U.S. 

person that guarantees a non-U.S. 

counterparty’s obligations under the 

swap, by ensuring that swaps are 

properly documented and recorded. 

In the Commission’s view, because 

Congress directed that the trade 

execution requirement apply to swaps 

that are subject to the clearing 

requirement and made available to 

trade, it is appropriate for the trade 

execution requirement to apply to those 

cross-border swaps that are subject to 

the clearing mandate and are made 

available to trade. The Commission 

believes that both requirements—the 

clearing mandate and trade execution 

requirement—are of fundamental 

importance to the management and 

reduction of risks posed by swap 

activities of market participants. 

Requiring swaps to be traded on a 

regulated exchange or execution facility 

provides market participants with 

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564Accordingly, the Commission disagrees with 

commenters who objected to the proposed 

interpretation on the ground that it would not 

advance the goal of mitigating the risk of credit 

exposure of the guarantor U.S. person to the nonU.S. swap dealer or non-U.S. MSP. The 

Transaction-Level Requirements also serve to 

protect against risk to the guarantor U.S. person by 

reducing the likelihood that its obligations under 

the guarantee will be called upon in the first 

instance. 

565See Final Swap Definition, 77 FR 48225– 

48226. 

566See generally note 532 and related discussion, 

supra. 

567 Id. at 48226. 

568AIG Report, supra note 5, at 20. 

569CEA section 4s(e)(1) provides that each 

registered swap dealer and MSP for which there is 

a prudential regulator shall meet such minimum 

capital requirements as the applicable prudential 

regulator shall prescribe, but that each registered 

swap dealer and MSP for which there is not a 

prudential regulator shall meet such minimum 

capital requirements as the Commission shall 

prescribe. 

greater pre- and post-trade transparency. 

Real-time public reporting improves 

price discovery by requiring that swap 

and pricing data be made publicly 

available. Taken together, the trade 

execution and real-time public reporting 

Transaction-Level Requirements 

provide important information to 

market participants and regulators with 

resulting efficiency in the marketplace. 

This, in turn, facilitates risk 

management which benefits swap 

counterparties and also serves to reduce 

the likelihood that a U.S. guarantor will 

be called upon to satisfy a non-U.S. 

counterparty’s swaps obligations.564

Further, in the Final Swap Definition, 

the Commission found that a guarantee 

of a swap is a term of that swap that 

affects the price or pricing attributes of 

that swap. The Commission therefore 

concluded that when a swap has the 

benefit of a guarantee, the guarantee is 

an integral part of that swap. The 

Commission explained that typically 

when a swap counterparty uses a 

guarantee as credit support for its swaps 

obligations, the guarantor’s resources 

are added to the analysis of the swap 

because ‘‘the market will not trade with 

that counterparty at the same price, on 

the same terms, or at all without the 

guarantee.’’ 565

For all the foregoing reasons, the 

Commission disagrees with commenters 

that asserted that it should not, or lacks 

the legal authority to, interpret CEA 

section 2(i) as to apply to swaps where 

one counterparty is a non-U.S. swap 

dealer or a non-U.S. MSP and the other 

counterparty is a non-U.S. person whose 

obligations under the swap are 

guaranteed by a U.S. person. Where a 

U.S. person provides a guarantee of a 

non-U.S. counterparty’s swaps 

obligations for which there is recourse 

to the U.S. person, where that guarantee 

is a term of the swap and affects the 

price or pricing attributes of that swap, 

and where the Transaction-Level 

Requirements serve to protect and 

mitigate risk to that U.S. person 

guarantor, the Commission believes that 

such swaps, either individually or in the 

aggregate, have a direct and significant 

connection with activities in, or effect 

on, U.S. commerce. 

The application of Dodd-Frank Act 

requirements to swaps of non-U.S. 

persons whose swaps obligations are 

guaranteed by U.S. persons is also 

consistent with foreign relations law. As 

noted in the discussion above regarding 

the application of these requirements to 

swaps of U.S. persons with non-U.S. 

persons, a major purpose of Title VII is 

to control the potential harm to U.S. 

markets that can arise from risks that are 

magnified or transferred between parties 

via swaps. Similarly, a guarantee— 

which is an integral part of a swap—can 

lead to the transfer of risk from the 

guaranteed non-U.S. person to the U.S. 

guarantor. Because Category A 

Transaction Level Requirements are 

designed to mitigate such risk transfer, 

the Commission believes there is a 

strong interest in applying the DoddFrank Act requirements to swaps of 

non-U.S. persons that are guaranteed by 

U.S. persons.566 However, the 

Commission also understands the 

countervailing interest of home country 

regulators in such swaps, and therefore 

believes that substituted compliance 

should generally be available in this 

context. 

The Commission also disagrees with 

commenters that suggested that its 

interpretation on this score should 

apply only to certain guaranteed swaps 

(e.g., not to swaps by non-financial 

entities entered into for hedging or risk 

mitigation purposes), or only to in 

certain circumstances (e.g., where the 

guaranteed non-U.S. counterparty’s 

swap activity is a certain percentage of 

its net equity or the aggregate potential 

liability of the U.S. guarantor with 

respect to the non-U.S. counterparty’s 

swaps obligations is a certain percentage 

of the guarantor’s net equity), or only to 

a certain extent (e.g., to swaps 

obligations in excess of a capped 

guarantee). In the Final Swap 

Definition, the Commission 

acknowledged that a ‘‘full recourse’’ 

guarantee would have a greater effect on 

the price of a swap than a ‘‘limited’’ or 

‘‘partial recourse’’ guarantee, yet 

nevertheless determined that the 

presence of any guarantee with 

recourse, no matter how robust, is price 

forming and an integral part of a 

guaranteed swap.567

The Commission similarly believes 

that the presence of any guarantee with 

recourse by a U.S. person of the swaps 

obligations of a non-U.S. counterparty to 

a swap with a non-U.S. swap dealer or 

non-U.S. MSP suffices to justify the 

application of Transaction-Level 

Requirements that swap. Therefore, as 

noted above, to the extent that a nonU.S. swap dealer or non-U.S. MSP 

would have recourse to the U.S. 

guarantor in connection with its swaps 

position, the Commission would 

generally expect such non-U.S. swap 

dealer or MSP to comply with the 

Category A Transaction-Level 

Requirements for such a guaranteed 

swap (although substituted compliance 

may satisfy compliance with such 

requirements to the extent it is 

applicable). Although the Commission 

believes all relevant facts and 

circumstances should be analyzed, as a 

general matter the Commission is of the 

view that the purpose for which the 

non-U.S. counterparty is entering into 

the swap, or the net equity of the nonU.S. counterparty or the guarantor, or 

the extent of the guarantee, would 

generally not warrant a different 

conclusion. 

Finally, the Commission disagrees 

with commenters that urged it to limit 

its interpretation in this regard to cases 

of evasion, or to exclude from the scope 

of its interpretation those swaps in 

which the non-U.S. counterparty is 

subject to appropriate capital 

requirements or the guarantor is a U.S. 

bank holding company. The events 

surrounding the collapse of AIGFP 

highlight how guarantees can cause 

major risks to flow to the guarantor. 

‘‘AIGFP’s obligations were guaranteed 

by its highly rated parent company . . . 

an arrangement that facilitated easy 

money via much lower interest rates 

from the public markets, but ultimately 

made it difficult to isolate AIGFP from 

its parent, with disastrous 

consequences.’’ 568

The Commission’s view is that the 

protections and mitigation of risk 

exposures afforded by the Category A 

Transaction-Level Requirements would 

be rendered far less effective if in the 

case of swaps where one counterparty is 

a non-U.S. swap dealer or a non-U.S. 

MSP and the other counterparty is a 

non-U.S. person guaranteed by a U.S. 

person such requirements only apply 

when such swaps are part of a scheme 

to evade the Dodd-Frank Act. Further, 

while capital requirements are an 

important element of the Title VII 

regime to reduce systemic risk,569 the 

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570See Appendix B for information regarding the 

Transaction-Level Requirements and the provisions 

of the CEA which they implement. 

571 In the Final Entities Rules, the Commission 

stated that it does ‘‘not believe that it is necessary 

to attribute a person’s swap or security-based swaps 

positions to a parent or other guarantor if the person 

is already subject to capital regulation by the CFTC 

or SEC (i.e., swap dealers, security-based swap 

dealers, MSPs, major security-based swap 

participants, FCMs and broker-dealers) or if the 

person is a U.S. entity regulated as a bank in the 

United States. Positions of those regulated entities 

already will be subject to capital and other 

requirements, making it unnecessary to separately 

address, via major participant regulations, the risks 

associated with guarantees of those positions.’’ See 

Final Entities Rules, 77 FR at 30689. The 

Commission continued, ‘‘As a result of this 

interpretation, holding companies will not be 

deemed to be major swap participants as a result 

of guarantees to certain U.S. entities that are already 

subject to capital regulation.’’ Id. at 30689 n. 1134. 

Subsequently, in the Final Swap Definition, the 

Commission stated that ‘‘[a]s a result of interpreting 

the term ‘swap’ (that is not a security-based swap 

or mixed swap) to include a guarantee of such 

swap, to the extent that a counterparty to a swaps 

position would have recourse to the guarantor in 

connection with the position, and based on the 

reasoning set forth [in the Final Entities Rules] in 

connection with major swap participants, the CFTC 

will not deem holding companies to be swap 

dealers as a result of guarantees to certain U.S. 

entities that are already subject to capital 

regulation.’’ See Final Swap Definition, 77 FR at 

48266 n.188. The Commission’s conclusion that 

capital compliance and prudential regulation, in 

certain circumstances, can obviate the need for 

registration as a swap dealer or MSP does not bear 

upon, and is not inconsistent with, the 

Commission’s interpretation herein that 

notwithstanding capital compliance and prudential 

regulation, Transaction-Level Requirements may be 

applied where a non-U.S. swap dealer or non-U.S. 

MSP enters into a swap with a non-U.S. 

counterparty whose obligations under that swap are 

guaranteed, with recourse, by a U.S. person. 

572See Proposed Guidance, 77 FR at 41229. 

573 Id. 

574SIFMA (Aug. 27, 2012) at A22–23; IIB at (Aug. 

27, 2012) at 20–21; Hong Kong Banks (Aug. 27, 

2012) at 13. 

575SIFMA (Aug. 27, 2012) at A23. See also IIAC 

(stating that the Commission should clarify the 

meaning of ‘‘regularly enters into swaps with . . . 

affiliates’’ and circumstances under which the 

Commission would interpret the financials of a 

non-U.S. counterparty to be combined with the 

financial statements of the U.S. person for purposes 

of applying Transaction-Level Requirements to 

transactions by U.S. persons that might be using 

conduits to avoid such requirements) (Aug. 27, 

2012) at 8. 

576SIFMA (Aug. 27, 2012) at A22. 

577 Goldman (Aug. 27, 2012) at 6. See also 

Japanese Bankers Association (Aug. 27, 2012) at 11 

(stating that it is difficult to determine under the 

Proposed Guidance when a counterparty is a 

conduit for a U.S. person, and that the conduit 

provisions should not be implemented). 

578 Goldman (Aug. 27, 2012) at 6. See also 

Peabody (Aug. 27. 2012) at 3 (stating that applying 

the Dodd-Frank requirements to swaps entered into 

or booked by affiliates of commercial end-users 

outside the United States to hedge or mitigate 

commercial risks of activities outside the United 

States will create an overlapping (and potentially 

inconsistent) tangle of international laws that will 

increase costs and potential liabilities associated 

with such swaps, and materially undermine their 

utility and risk mitigation benefits; stating further 

that foreign entities wishing to avoid becoming 

subject to Dodd-Frank requirements will decline to 

enter into swaps with such affiliates, thereby 

Continued 

comprehensive regulatory structure 

established by the Dodd-Frank Act goes 

beyond such requirements. The CEA, as 

amended by the Dodd-Frank Act, also 

requires the imposition of the 

Transaction-Level Requirements 570

except to the extent that section 2(i) 

limits their application to cross-border 

transactions or activities. Therefore, the 

Commission believes that, rather than 

excluding the swaps at issue from the 

scope of the Title VII regulatory regime, 

with the corresponding increase in risk 

to U.S. persons and to the U.S. financial 

system, in most cases compliance with 

the Category A Transaction-Level 

Requirements is appropriate where nonU.S. swap dealers and non-U.S. MSPs 

that enter into swaps with non-U.S. 

counterparties guaranteed by a U.S. 

person. Further, the Commission does 

not believe that a different 

interpretation should be taken solely 

because applicable capital requirements 

are satisfied.571

In addition, the Commission believes 

that this Guidance, which contemplates 

a system of substituted compliance in 

accordance with principles of 

international harmonization, may allow 

non-U.S. swap dealers and non-U.S. 

MSPs to comply, in appropriate 

circumstances, with their home-country 

requirements when transacting with 

non-U.S. counterparties whose swaps 

obligations are guaranteed with recourse 

by U.S. persons. The Commission 

believes that the substituted compliance 

regime contemplated by the Guidance 

will facilitate equivalent regulatory 

treatment of equivalent swaps without 

undermining the swaps reforms enacted 

by Congress in Title VII. 

d. Swaps With a Non-U.S. Person That 

is an Affiliate Conduit 

i. Proposed Guidance 

The Commission proposed to 

interpret CEA section 2(i) such that the 

Category A Transaction-Level 

Requirements would apply to a swap if 

at least one of the parties to the swap 

is an ‘‘affiliate conduit.’’ Under the 

Proposed Guidance, an affiliate conduit 

exists when: (1) A non-U.S. person that 

is majority-owned, directly or 

indirectly, by a U.S. person; (2) the nonU.S. person regularly enters into swaps 

with one or more of its U.S. affiliates of 

its U.S. person owner; and (3) the 

financial results of such non-U.S. 

person are included in the consolidated 

financial statements of its U.S. person 

owner.572 The Commission explained 

that it believed the proposed application 

of Transaction-Level Requirements was 

necessary because, ‘‘given the nature of 

the relationship between the conduit 

and the U.S. person, the U.S. person is 

directly exposed to risks from and 

incurred by’’ the affiliate conduit.573

The Commission further indicated that 

it was concerned that a U.S. swap dealer 

or U.S. MSP would utilize affiliate 

conduits to conduct swaps outside the 

Dodd-Frank regulatory regime. 

ii. Comments 

The commenters who addressed the 

Commission’s proposed approach to 

affiliate conduits expressed concerns 

about what they felt was an overly broad 

scope of the term ‘‘affiliate conduit.’’ 

Several of these commenters stated that 

the non-U.S. affiliate conduit concept 

should be omitted from the 

Guidance.574 SIFMA stated that the term 

‘‘regular’’ is too vague in that ‘‘it does 

not account for the purpose of the interaffiliate swap, the relative amount of the 

conduit’s risk transferred, the nature of 

the transferred risk, or whether some or 

all of the risk is transferred.’’575 SIFMA 

also commented that activities of a nonU.S. affiliate conduit do not satisfy the 

requisite nexus to the United States 

under section 2(i) to justify different 

treatment from other non-U.S. 

counterparties. Further, SIFMA stated 

that where substituted compliance is 

unavailable, a non-U.S. swap dealer 

transacting with an affiliate conduit is 

subject to applicable Transaction-Level 

Requirements, which could cause nonU.S. swap dealers to cease doing 

business with non-U.S. affiliate 

conduits.576 As an alternative, SIFMA 

recommended that the proposed affiliate 

conduit provision that the conduit 

‘‘regularly enter into swaps’’ should be 

replaced with a provision that the 

conduit ‘‘regularly enter[ ] into swaps 

with one or more other U.S. affiliates of 

the U.S. person for the purpose of 

transferring to that U.S. person all risk 

of swap activity.’’ 

Other commenters raised similar 

objections concerning the scope of the 

affiliate conduit provision. Goldman 

stated that the proposed description of 

an affiliate conduit was so broad that 

‘‘an entity could be rendered a conduit 

by executing even a single trade despite 

the fact that the entity otherwise would 

be eligible for substituted compliance, 

or would not fall within Title VII’s 

jurisdiction at all.’’ 577 Such a broad 

definition, in Goldman’s view, will 

result in competitive disparities for 

foreign affiliates of U.S.-based swap 

dealers and may even cover nonfinancial entities attempting to hedge 

risk.578 SIFMA added that the concept 

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decreasing market liquidity, increasing market risk 

competition, imposing higher commercial costs, 

and resulting in higher prices for customers and 

downstream consumers, and would put U.S. 

business at a competitive disadvantage in global 

markets). 

579SIFMA (Aug. 27, 2012) at A24. 

580Hong Kong Banks (Aug. 27, 2012) at 13. 

581Peabody (Aug. 28, 2012) at 2–3. 

582SIFMA (Aug. 27, 2012) at A24. SIFMA stated 

that the determination of whether a counterparty to 

a swap is a non-U.S. affiliate conduit should be 

made at the inception of the swap based on the 

most recent updated representation from the 

counterparty, which should be renewed by the 

counterparty once per calendar year. Id. at A25. 

583 IIB (Aug. 27, 2012) at 20–21. 

584 Id. at 19. 

585See Proposed Guidance, 77 FR at 41229. 

586One market participant described the 

functions of such a conduit and its relationship 

with respect to other affiliates within the corporate 

group in the following manner: 

Many business enterprises, including [Prudential 

Financial Inc., or ‘‘PFI’’], elect to operate in a 

manner that assigns specific functions to related 

and commonly-controlled affiliates. With regard to 

swap transactions, it has long been our practice, as 

an enterprise-type company with separate legal 

entities that are commonly owned by PFI to use one 

affiliate, Prudential Global Funding LLC (‘‘PGF’’), to 

directly face the market as a ‘‘conduit’’ to hedge the 

net commercial and financial risk of the various 

operating affiliates within PFI. Under this practice, 

only PGF (i.e., the conduit) is required to trade with 

external market participants, while the internal 

affiliates within PFI trade directly with the PGF. 

The use of PGF as the single conduit for the various 

operating affiliates within PFI diminishes the 

demands on PFI’s financial liquidity, operational 

assets and management resources, as affiliates 

within PFI avoid having to establish independent 

relationships and unique infrastructure to face the 

market. Moreover, use of PGF as a conduit within 

PFI permits the netting of our affiliates’ trades (e.g., 

one affiliate is hedging floating rates while another 

is hedging fixed rates). This effectively reduces the 

overall risk of PFI and our affiliates, and allows us 

to manage fewer outstanding positions with 

external market participants. 

The Prudential Insurance Company of America 

(Feb. 17, 2011) at 2. 

587See The Prudential Insurance Company of 

America (Feb. 17, 2011); Kraft Foods (‘‘Kraft’’) (Feb. 

11, 2011). 

of indirect majority ownership is 

imprecise and its application to nonU.S. affiliate conduits is unclear.579

Hong Kong Banks believed that the 

conduit proposal is unnecessary since 

its activities would be captured in the 

registration process.580 Peabody stated 

that the application of TransactionLevel Requirements to affiliate conduits 

seemingly contradicts the Proposed 

Guidance’s treatment of foreign affiliates 

as non-U.S. persons.581 If the affiliate 

conduit concept remains in the 

Guidance, SIFMA requested that the 

Commission clarify whether or not swap 

dealers may rely on a counterparty’s 

representations as to its non-U.S.- 

affiliate’s conduit status.582

IIB stated that the Commission should 

withdraw its proposal on affiliate 

conduits and instead, where there is 

clear circumvention, rely on its existing 

anti-evasion authority.583 It added that 

the Commission’s proposal for the 

‘‘conduit’’ treatment of a foreign entity 

that ‘‘regularly’’ engages in back-to-back 

swaps with a U.S. affiliate is 

unjustifiably broad. IIB also stated that 

the proposed standard is inconsistent 

with statutory standards for the 

extraterritorial application of Title VII, 

and that there is no basis to conclude 

that inter-affiliate swaps create direct 

and significant risk to the United States 

simply because they occur 

‘‘regularly.’’ 584

iii. Commission Guidance 

In the Proposed Guidance, the 

Commission explained that it believed 

the proposed application of 

Transaction-Level Requirements was 

necessary because, ‘‘given the nature of 

the relationship between the conduit 

and the U.S. person, the U.S. person is 

directly exposed to risks from and 

incurred by’’ the affiliate conduit.585

The Commission further indicated that 

it was concerned that a U.S. swap dealer 

or U.S. MSP would utilize affiliate 

conduits to conduct swaps outside the 

Dodd-Frank regulatory regime. 

For purposes of this policy statement, 

the Commission is clarifying that an 

affiliate conduit encompasses those 

entities that function as a conduit or 

vehicle for U.S. persons conducting 

swaps transactions with third-party 

counterparties. In response to comments 

received, the Commission is identifying 

some of the factors that the Commission 

believes are relevant to determining 

whether a non-U.S. person is an 

‘‘affiliate conduit’’ of a U.S. person. As 

explained in greater detail below, 

modifications to the Proposed Guidance 

with regard to the term ‘‘affiliate 

conduit’’ are intended to respond to 

commenters’ concerns about a lack of 

clarity on the scope of the term affiliate 

conduit and to better identify those nonU.S. affiliates whose swap activities, 

either individually or in the aggregate, 

have a direct and significant connection 

with activities in, or effect on, U.S. 

commerce as a result of their 

relationship with their U.S. affiliates. 

Specifically, the Commission is 

modifying the factors that might be 

relevant to the consideration of whether 

a non-U.S. affiliate of a U.S. person is 

an affiliate conduit by: (1) clarifying the 

meaning of ‘‘regularly enters into 

swaps,’’ and in particular, the activities 

of a non-U.S. counterparty that renders 

it an affiliate conduit; and (2) adding the 

concept of ‘‘control.’’ 

As the Commission understands, it is 

common for large global companies to 

centralize their hedging or riskmanagement activities in one or more 

affiliates (informally referred to as a 

‘‘treasury conduit’’ or ‘‘conduit’’). Under 

this structure, the conduit may enter 

into swaps with its affiliates and then 

enter into offsetting swaps with thirdparties. In other cases, the conduit may 

enter into swaps with third-parties as 

agent for its affiliates. In either case, the 

conduit functions as a vehicle by which 

various affiliates engage in swaps with 

third-parties (i.e., the market). This 

paradigm promotes operational 

efficiency and prudent risk management 

by enabling a company to manage its 

risks on a consolidated basis at a group 

level.586 Accordingly, based on 

comments, rather than considering 

whether a non-U.S. person ‘‘regularly 

enters into swaps’’ with one or more of 

its U.S. affiliates of its U.S. person 

owner, the Commission will generally 

consider whether the non-U.S. person, 

in the regular course of business, 

engages in swaps with non-U.S. thirdparties for the purpose of hedging or 

mitigating risks faced by, or to take 

positions on behalf of, its U.S. affiliates, 

and enters into offsetting swaps or other 

arrangements with its U.S. affiliates in 

order to transfer the risks and benefits 

of such swaps with third-parties to its 

U.S. affiliates. 

The Commission recognizes the 

significant benefits associated with a 

corporate group’s use of a single entity 

to conduct the group’s market-facing 

swap business. The Commission also 

believes, though, that in this situation 

the risks resulting from swaps of the 

entity that faces the market as a conduit 

on behalf of its affiliates in fact reside 

with those affiliates; that is, while the 

swaps are entered into by the conduit, 

through back-to-back swaps or other 

arrangements the conduit passes the 

risks and benefits of those swaps to its 

affiliates.587 Where the conduit is 

located outside the United States, but is 

owned and controlled by a U.S. person, 

the Commission believes that to 

recognize the economic reality of the 

situation, the conduit’s swaps should be 

attributed to the U.S. affiliate(s). The 

fact that the conduit is located outside 

the United States does not alter the 

economic reality that its swaps are 

undertaken for the benefit of, and at the 

economic risk of, the U.S. affiliate(s), 

and more broadly, for the corporate 

group that is owned and controlled by 

a U.S. person. Under these 

circumstances, the Commission believes 

that the swap activities of the non-U.S. 

conduit may meet the ‘‘direct and 

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588 In this respect, it is irrelevant whether the risk 

is wholly or partly transferred back to the U.S. 

affiliate(s); the jurisdictional nexus is met by reason 

of the trading relationship between the conduit and 

the affiliated U.S. persons. 

589This is consistent with the Commission’s 

approach to the determination of whether a 

counterparty is a ‘‘U.S. person.’’ See section IV.A, 

supra. 

590See Kraft (Feb. 11, 2011) at 3. 

591Commission regulation 1.3(ggg)(6)(i) defines 

‘‘majority-owned affiliates’’ as follows: 

[C]ounterparties to a swap are majority-owned 

affiliates if one counterparty directly or indirectly 

owns a majority interest in the other, or if a third 

party directly or indirectly owns a majority interest 

in both counterparties to the swap, where ‘majority 

interest’ is the right to vote or direct the vote of a 

majority of a class of voting securities of an entity, 

the power to sell or direct the sale of a majority of 

a class of voting securities of an entity, or the right 

to receive upon dissolution or the contribution of 

a majority of the capital of a partnership. 

592Commission regulation 1.3(ggg)(4)(i) refers to 

an ‘‘entity controlling, controlled by or under 

common control with the person.’’ Final Entities 

Rules elaborated on this provision, stating: 

For these purposes, we interpret control to mean 

the possession, direct or indirect, of the power to 

direct or cause the direction of the management and 

policies of a person, whether through the 

ownership of voting securities, by contract or 

otherwise. This is consistent with the definition of 

‘‘control’’ and ‘‘affiliate’’ in connection with 

Exchange Act rules regarding registration 

statements. See Exchange Act rule 12b–2. . . . 

77 FR 30631 n. 437, and 

[I]f a parent entity controls two subsidiaries 

which both engage in activities that would cause 

the subsidiaries to be covered by the dealer 

definitions, then each subsidiary must aggregate the 

swaps or security-based swaps that result from both 

subsidiaries’ dealing activities in determining if 

either subsidiary qualifies for the de minimis 

exception. 

Id. at n. 438. 

593The categorization of Transaction-Level 

Requirements into Categories A and B is discussed 

in section E, supra. See Appendix B for a 

descriptive list of the Category A and Category B 

requirements and Appendix D for a table 

summarizing the application of the Category A 

Transaction-Level Requirements to Swap Dealers 

and MSPs. The Appendices to this Guidance should 

be read in conjunction with this section and the rest 

of the Guidance. 

594See Appendix E to this Guidance for a 

summary of these requirements and the discussion 

in section D, supra. 

significant’’ jurisdictional nexus within 

the meaning of CEA section 2(i).588

Further, in order to facilitate a 

consistent application of the term 

affiliate conduit and to mitigate any 

undue burden or complexity for market 

participants in assessing affiliate 

conduit status, the Commission clarifies 

that its policy contemplates that a 

market participant may reasonably rely 

on counterparty representations as to its 

non-U.S. affiliate conduit status.589

Finally, the Commission notes in 

response to commenters that an affiliate 

conduit would not necessarily be 

guaranteed by its parent. As one market 

participant explained, ‘‘centralized 

hedging centers are generally evaluated 

as wholly-owned subsidiaries of the 

corporate group that do not require 

additional credit support, such as a 

parent guaranty or collateral.’’ 590

Therefore, the Commission believes that 

it is reasonable and appropriate to 

interpret CEA section 2(i) in a manner 

that recognizes an affiliate conduit as a 

separate category of counterparty whose 

swaps with non-U.S. persons may be 

subject to certain Transaction-Level 

Requirements. Specifically, where one 

of the parties to the swap is a conduit 

affiliate, the Commission would 

generally expect the parties to the swap 

only to comply with (to the extent that 

the Inter-Affiliate Exemption is elected), 

the conditions of the Inter-Affiliate 

Exemption, including the treatment of 

outward-facing swaps condition in 

Commission regulation 50.52(b)(4)(i). In 

addition, the part 43 real-time reporting 

requirements must be satisfied. 

In summary, for the purposes of the 

Commission’s interpretation of CEA 

section 2(i), the Commission believes 

that certain factors are relevant to 

considering whether a non-U.S. person 

is an ‘‘affiliate conduit.’’ Such factors 

include whether: 

(i) the non-U.S. person is a majority-owned 

affiliate 591 of a U.S. person; 

(ii) the non-U.S. person is controlling, 

controlled by or under common control 592

with the U.S. person; 

(iii) the financial results of the non-U.S. 

person are included in the consolidated 

financial statements of the U.S. person; and 

(iv) the non-U.S. person, in the regular 

course of business, engages in swaps with 

non-U.S. third-party(ies) for the purpose of 

hedging or mitigating risks faced by, or to 

take positions on behalf of, its U.S. 

affiliate(s), and enters into offsetting swaps or 

other arrangements with its U.S. affiliate(s) in 

order to transfer the risks and benefits of 

such swaps with third-party(ies) to its U.S. 

affiliates. 

Other facts and circumstances also may 

be relevant. The Commission does not 

intend that the term ‘‘conduit affiliate’’ 

would include affiliates of swap dealers. 

5. Application of the ‘‘Category B’’ 

Transaction-Level Requirements to 

Swap Dealers and MSPs 

This section discusses the 

Commission’s policy on the application 

of the Category B Transaction-Level 

Requirements to swaps in which at least 

one of the parties to the swap is a 

registered swap dealer or MSP. As noted 

earlier, the Category B Transaction Level 

Requirements pertain to external 

business conduct standards which the 

Commission adopted pursuant to CEA 

section 4s(b) as a Category B 

Transaction-Level Requirement.593

Consistent with the Proposed 

Guidance, the Commission will 

generally interpret CEA section 2(i) so 

that the Category B Transaction-Level 

Requirements (i.e., the external business 

conduct standards) either do or do not 

apply to the swap, based on the 

counterparties to the swap, as explained 

below. Under this interpretation, 

substituted compliance is generally not 

expected to be applicable with regard to 

the Category B Transaction-Level 

Requirements under this Guidance.594

In considering whether Category B 

Transaction-Level Requirements are 

applicable, the Commission would 

generally consider whether the swap is 

with a: 

(i) U.S. swap dealer or U.S. MSP (including 

affiliates of non-U.S. persons); 

(ii) foreign branch of a U.S. bank that is a 

swap dealer or MSP; or 

(iii) non-U.S. swap dealer or non-U.S. MSP 

(including an affiliate of a U.S. person). 

Specifically, as explained more 

below, where a swap is with a U.S. 

swap dealer or U.S. MSP, the parties to 

the swap generally should be subject to 

the Category B Transaction-Level 

Requirements in full, regardless of 

whether the other counterparty to the 

swap is a U.S. person or a non-U.S. 

person. However, in the case of a foreign 

branch of a U.S. bank that is a swap 

dealer or MSP, or a non-U.S. swap 

dealer or non-U.S. MSP, the parties to 

the swap should generally only be 

subject to the Category B TransactionLevel Requirements when the 

counterparty to the swap is a U.S. 

person (other than a foreign branch of a 

U.S. bank that is a swap dealer or MSP). 

Conversely, under the Commission’s 

interpretation of 2(i), where a swap is 

between a non-U.S. swap dealer or nonU.S. MSP (including an affiliate of a 

U.S. person) and a non-U.S. 

counterparty (regardless of whether the 

non-U.S. counterparty is a guaranteed or 

conduit affiliate), the parties to the swap 

would not be expected to comply with 

the Category B Transaction-Level 

Requirements. The reasons for the 

Commission’s policies are discussed 

below. 

The application of the Category B 

Transaction-Level Requirements is 

summarized in Appendix E to this 

Guidance, which should be read in 

conjunction with the rest of this 

Guidance. 

a. Swaps With U.S. Swap Dealers and 

U.S. MSPs 

As explained above, where a swap is 

with a U.S. swap dealer or U.S. MSP 

(including an affiliate of a non-U.S. 

person), the Commission’s policy is that 

the parties to the swap should be subject 

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595For the reasons discussed in note 531, supra, 

where the counterparty to the swap is an 

international financial institution, the Commission 

also generally would not expect the parties to the 

swap to comply with the Category B TransactionLevel Requirements, even if the principal place of 

business of the international financial institution 

were located in the United States. 

596See section C, supra, regarding the definition 

of a foreign branch and the determination of when 

a swap transaction is with a foreign branch for 

purposes of this Guidance. 

597 In this case, although the foreign branch 

would not register separately as a swap dealer, the 

Commission interprets 2(i) in a manner that would 

permit the U.S. person to task its foreign branch to 

fulfill its regulatory obligations with respect to the 

Category B Transaction-Level Requirements. The 

Commission would consider compliance by the 

foreign branch or agency to constitute compliance 

with these Transaction-Level Requirements. 

However, under the Commission’s interpretation of 

2(i), the U.S. person (principal entity) would remain 

responsible for compliance with the Category B 

Transaction-Level Requirements. 

598As noted above, for the reasons discussed in 

note 531, where the counterparty to the swap is an 

international financial institution, the Commission 

also generally would not expect the parties to the 

swap to comply with the Category B TransactionLevel Requirements, even if the principal place of 

business of the international financial institution 

were located in the United States. 

599As discussed in greater detail above, the 

Commission notes that there are no exempt DCOs 

at this time. If and when the Commission 

determines to exercise its authority to exempt DCOs 

from applicable registration requirements, the 

Commission would likely address, among other 

things, the conditions and limitations applicable to 

clearing swaps for customers subject to section 4d(f) 

of the CEA. 

600See 17 CFR 23.402(b)–(c) (requiring swap 

dealers and MSPs to obtain and retain certain 

information only about each counterparty ‘‘whose 

identity is known to the swap dealer or MSP prior 

to the execution of the transaction’’); 23.430(e) (not 

requiring swap dealers and MSPs to verify 

counterparty eligibility when a transaction is 

entered on a DCM or SEF and the swap dealer or 

MSP does not know the identity of the counterparty 

prior to execution); 23.431(c) (not requiring 

disclosure of material information about a swap if 

initiated on a DCM or SEF and the swap dealer or 

MSP does not know the identity of the counterparty 

prior to execution); 23.450(h) (not requiring swap 

dealers and MSPs to have a reasonable basis to 

believe that a Special Entity has a qualified, 

independent representative if the transaction with 

the Special Entity is initiated on a DCM or SEF and 

the swap dealer or MSP does not know the identity 

of the Special Entity prior to execution); 

23.451(b)(2)(iii) (disapplying the prohibition on 

entering into swaps with a governmental Special 

Entity within two years after any contribution to an 

official of such governmental Special Entity if the 

swap is initiated on a DCM or SEF and the swap 

dealer or MSP does not know the identity of the 

Special Entity prior to execution). 

to the Category B Transaction-Level 

Requirements in full, regardless of 

whether the counterparty is a U.S. 

person or a non-U.S. person, without 

substituted compliance available. 

b. Swaps With Foreign Branches of a 

U.S. Bank That Is a Swap Dealer or MSP 

In the case of a swap with a foreign 

branch of a U.S. bank that is a swap 

dealer or MSP, the Commission’s policy 

is that the Category B Transaction-Level 

Requirements should apply only if the 

counterparty to the swap is a U.S. 

person (other than a foreign branch of a 

U.S. bank that is a swap dealer or 

MSP).595

The Commission believes that where 

a swap is between a foreign branch of 

a U.S. bank that is a swap dealer or 

MSP 596 and a U.S. person (other than a 

foreign branch of a U.S. bank that is a 

swap dealer or MSP), the swap has a 

direct and significant connection with 

activities in, or effect on, U.S. 

commerce. Because of the significant 

risks to U.S. persons and the financial 

system presented by such swap 

activities, under the Commission’s 

interpretation of CEA section 2(i), 

generally the parties to the swap should 

comply with the Category B Transaction 

Level Requirements. Whenever a swap 

involves at least one counterparty that is 

a U.S. person, the Commission believes 

it has a strong supervisory interest in 

regulating and enforcing TransactionLevel Requirements, including external 

business conduct standards. In this case, 

the Commission believes the transaction 

should be viewed as being between two 

U.S. persons. For these reasons, the 

Commission’s policy under section 2(i) 

is that substituted compliance would 

not be available.597

However, where the swap is between 

a foreign branch of a U.S. bank that is 

a swap dealer or MSP, on the one hand, 

and a non-U.S. person on the other 

(whether or not such non-U.S. person is 

a guaranteed or conduit affiliate), the 

Commission believes that the interests 

of the foreign jurisdiction in applying its 

own transaction-level requirements to 

the swap are sufficiently strong that the 

Category B Transaction-Level 

Requirements generally should not 

apply under section 2(i). In this case, 

even though the Commission considers 

a foreign branch of a U.S. bank that is 

a swap dealer or MSP to be a U.S. 

person, the Commission believes that 

because the counterparty is a non-U.S. 

person and the swap takes place outside 

the United States, foreign regulators 

may have a relatively stronger 

supervisory interest in regulating and 

enforcing sales practices related to the 

swap. Therefore, in light of international 

comity principles, the Commission 

believes that application of the Category 

B Transaction-Level Requirements may 

not be warranted in this case. Therefore, 

under the Commission’s interpretation 

of section 2(i), the parties to the swap 

generally would not be expected to 

comply with the Category B 

Transaction-Level Requirements. 

The Commission believes that, in the 

context of the Category B TransactionLevel Requirements, the same reasoning 

also should apply to a swap between 

two foreign branches of U.S. banks that 

are each swap dealers or MSPs. Just as 

the Commission would have a strong 

supervisory interest in regulating and 

enforcing sales practices associated with 

activities taking place within the United 

States, the foreign regulators would 

have a similar claim to overseeing sales 

practices occurring within their 

jurisdiction. 

Accordingly, the Commission 

interprets CEA section 2(i) so that where 

a swap is between the foreign branch of 

a U.S. bank that is a swap dealer or 

MSP, on the one hand, and either a nonU.S. person or a foreign branch of a U.S. 

bank that is a swap dealer or MSP, on 

the other, the parties to the swap 

generally would not be expected to 

comply with the Category B 

Transaction-Level Requirements. 

c. Swaps With Non-U.S. Swap Dealers 

and Non-U.S. MSPs 

Under the Commission’s 

interpretation of 2(i), where a swap is 

between a non-U.S. swap dealer or nonU.S. MSP (including an affiliate of a 

U.S. person), on the one hand, and a 

U.S. person, on the other, the parties to 

the swap generally would be expected 

to comply with the Category B 

Transaction-Level Requirements.598 In 

the Commission’s view, in this case, the 

swap should be subject to the provisions 

of Title VII of the Dodd-Frank Act and 

Commission implementing regulations, 

including the Category B TransactionLevel Requirements. Because of the 

significant risks to U.S. persons and the 

financial system presented by swap 

activities outside the United States 

where one of the counterparties to the 

swap is a U.S. person (whether inside or 

outside the United States), the 

Commission believes that a U.S. 

person’s swap activities with a non-U.S. 

counterparty has the requisite direct and 

significant connection with activities in, 

or effect on, U.S. commerce under CEA 

section 2(i) to apply the Category B 

Transaction-Level Requirements to the 

transaction. 

The Commission observes that, where 

a swap between a non-U.S. swap dealer 

and a U.S. person is executed 

anonymously on a registered DCM or 

SEF and cleared by a registered DCO,599

the Category B Transaction-Level 

Requirements would not be 

applicable.600

Because a registered FBOT is 

analogous to a DCM, the Commission is 

of the view that the requirements 

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601See Appendix E to this Guidance for a 

summary of these requirements and the discussion 

in section E, supra. 

602See section IV.D, supra. Part 45 of the 

Commission’s regulations requires swap 

counterparties that are not swap dealers or MSPs to 

keep ‘‘full, complete and systematic records, 

together with all pertinent data and memoranda’’ 

with respect to each swap to which they are a 

counterparty. See 17 C.F. R. 45.2. Such records 

must include those demonstrating that they are 

entitled, with respect to any swap, to make use of 

the clearing exception in CEA section 2(h)(7). Swap 

counterparties that are not swap dealers or MSPs 

must also comply with the Commission’s 

regulations in part 46, which address the reporting 

of data relating to pre-enactment swaps and data 

relating to transition swaps. 

603Nothing in this Guidance should be construed 

to address the ability of a foreign board of trade to 

offer swaps to U.S. persons pursuant to part 48 of 

the Commission’s regulations. 

604See Proposed Guidance, 77 FR 41234 n. 138. 

Further, in the Proposed Guidance, the Commission 

stated that it believes that section 2(i) does not 

require a transaction-by-transaction determination 

that a particular swap outside the United States has 

a direct and significant connection with activities 

in, or effect on, commerce of the United States in 

order to apply the swaps provisions of the CEA to 

such transactions; rather, it is the aggregate of such 

activities and the aggregate connection of such 

activities with activities in the U.S. or effect on U.S. 

commerce that warrants application of the CEA 

swaps provisions to all such activities. See 

Hoffmann-La Roche, 542 U.S. at 168 (responding 

that respondents’ recommendation that the court 

should take account of comity considerations on a 

case by case basis is ‘‘too complex to prove 

workable’’). 

605For the reasons discussed in note 531, supra, 

one or more of the counterparties to a swap between 

non-registrants is an international financial 

institution, the Commission generally would not 

expect the parties to the swap to comply with the 

Non-Registrant Requirements, even if the principal 

place of business of the international financial 

institution were located in the United States. 

likewise would not be applicable where 

such a swap is executed anonymously 

on a registered FBOT and cleared. 

Conversely, under the Commission’s 

interpretation of 2(i), where a swap is 

between a non-U.S. swap dealer or nonU.S. MSP (including an affiliate of a 

U.S. person) and a non-U.S. 

counterparty (regardless of whether the 

non-U.S. counterparty is a guaranteed or 

conduit affiliate), the parties to the swap 

would not be expected to comply with 

the Category B Transaction-Level 

Requirements. The Commission believes 

that regulators may have a relatively 

stronger supervisory interest in 

regulating the Category B TransactionLevel Requirements related to swaps 

between non-U.S. persons taking place 

outside the United States than the 

Commission, and that therefore 

applying the Category B TransactionLevel Requirements to these 

transactions may not be warranted. The 

Commission notes that just as the 

Commission would have a strong 

supervisory interest in regulating and 

enforcing the Category B TransactionLevel Requirements associated with 

activities taking place in the United 

States, foreign regulators would have a 

similar claim to overseeing sales 

practices for swaps occurring within 

their jurisdiction. 

For the reasons stated in section b 

above, under the Commission’s 

interpretation of section 2(i), where a 

swap is between a non-U.S. swap dealer 

or non-U.S. MSP (including an affiliate 

of a U.S. person), on the one hand, and 

the foreign branch of a U.S. bank that is 

a swap dealer or MSP, on the other, the 

parties to the swap generally would not 

be expected to comply with the 

Category B Transaction-Level 

Requirements. 

As noted previously, under the 2(i) 

interpretations, substituted compliance 

is generally not expected to be 

applicable to the Category B 

Transaction-Level Requirements under 

this Guidance.601

H. Application of the CEA’s Swap 

Provisions and Commission Regulations 

to Market Participants That Are Not 

Registered as a Swap Dealer or MSP 

This section sets forth the 

Commission’s general policy on 

application of the CEA’s swaps 

provisions and Commission regulations 

to swap counterparties that are not 

registered as swap dealers or MSPs 

(‘‘non-registrants’’), including the 

circumstances under which the 

counterparties would be eligible for 

substituted compliance. 

Several of the CEA’s swaps provisions 

and Commission regulations—namely, 

those relating to required clearing, trade 

execution, real-time public reporting, 

Large Trader Reporting, SDR Reporting, 

and swap data recordkeeping 

(collectively, the ‘‘Non-Registrant 

Requirements’’) 602—also apply to 

persons or counterparties other than a 

swap dealer or MSP. In this section, the 

Commission sets forth the Commission’s 

policy on application of these NonRegistrant Requirements to cross-border 

swaps in which neither counterparty is 

a swap dealer or MSP (i.e., all other 

market participants including ‘‘financial 

entities,’’ as defined in CEA section 

2(h)(7)(C)).603

Section 1 discusses the Commission’s 

policy under CEA section 2(i) with 

regard to the application of the NonRegistrant Requirements to cross-border 

swaps between two non-registrants 

where one (or both) of the 

counterparties to the swap is a U.S. 

person. Substituted compliance is not 

applicable where one (or both) swap 

counterparties is a U.S. person. 

Section 2 discusses the Commission’s 

policy under CEA section 2(i) with 

regard to the application of the NonRegistrant Requirements to cross-border 

swaps between two non-registrants 

where both counterparties to the swap 

are non-U.S. persons. The eligibility of 

various counterparties to such swaps for 

substituted compliance is also 

addressed in section 2. 

The application of the specified 

Dodd-Frank provisions and Commission 

regulations specified below to swaps 

between counterparties that are neither 

swap dealers nor MSPs is summarized 

in Appendix F to this Guidance, which 

should be read in conjunction with the 

rest of this Guidance. 

1. Swaps Between Non-Registrants 

Where One or More of the NonRegistrants is a U.S. Person 

As noted in the Proposed Guidance, 

to manage risks in a global economy, 

U.S. persons may need to, and 

frequently do, transact swaps with both 

U.S. and non-U.S. counterparties. The 

swap activities of U.S. persons, 

particularly those with global 

operations, frequently occur outside of 

U.S. borders. 

With regard to cross-border swaps 

between two non-registrants where one 

(or both) of the counterparties to the 

swap is a U.S. person (including an 

affiliate of a non-U.S. person), the 

Commission’s interprets CEA 2(i) such 

that the parties to the swap generally 

would be expected to comply with the 

Non-Registrant Requirements. As the 

Commission noted in the Proposed 

Guidance, the risks to U.S. persons and 

the U.S. financial system do not depend 

on the location of the swap activities of 

U.S. persons.604 Where one or both of 

the counterparties to a swap between 

two non-registrants is a U.S. person, the 

Commission believes that the U.S. 

persons’ swap activities (whether inside 

or outside the United States)—due their 

presence in the U.S. and relationship to 

U.S. commerce—have a direct and 

significant connection with activities in, 

or effect on, U.S. commerce. Therefore, 

the Commission’s policy is that where a 

swap transaction is between nonregistrants, and one or more of the 

counterparties is a U.S. person, 

generally the parties to the swap will be 

expected to comply in full with the 

Non-Registrant Requirements.605 In 

addition, where one or more of the 

counterparties to a swap between nonregistrants is a U.S. person, the 

Commission’s policy generally is that 

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606See Restatement §§ 403(2)(a)–(c). 

607The Commission notes that under CEA section 

5b(h), the Commission has discretionary authority 

to exempt DCOs, conditionally or unconditionally, 

from the applicable DCO registration requirements. 

Specifically, section 5b(h) of the Act provides that 

‘‘[t]he Commission may exempt, conditionally or 

unconditionally, a derivatives clearing organization 

from registration under this section for the clearing 

of swaps if the Commission determines that the 

[DCO] is subject to comparable, comprehensive 

supervision and regulation by the Securities and 

Exchange Commission or the appropriate 

government authorities in the home country of the 

organization.’’ Thus, the Commission has discretion 

to exempt from registration DCOs that, at a 

minimum, are subject to comparable and 

comprehensive supervision by another regulator. 

The Commission further notes that it has not yet 

exercised its discretionary authority to exempt 

DCOs from registration, and that until such time as 

the Commission determines to exercise such 

authority, swaps subject to the clearing requirement 

must be submitted to registered DCOs for clearing. 

608 In addition to the End-User Exception under 

CEA section 2(h)(7), which is codified in 

Commission regulation 50.50, as noted above, the 

Commission has adopted an exemption from 

required clearing for swaps between certain 

affiliated entities, codified at Commission 

regulation 50.52. See Inter-Affiliate Exemption, 78 

FR 21750. 

609 Id. at 21765 (requiring, among other 

conditions, that eligible affiliate counterparties 

electing the exemption from clearing for the interaffiliate swap must clear their swaps with 

unaffiliated counterparties, and permitting eligible 

affiliate counterparties located in foreign 

jurisdictions to clear such swaps pursuant to their 

applicable foreign jurisdictions’ clearing regime, if 

the Commission determines that such regime is 

comparable and comprehensive to the U.S. clearing 

mandate). 

610 In particular, in the Inter-Affiliate Exemption, 

the Commission permitted eligible affiliate 

counterparties located outside of the U.S. to comply 

with a condition of the exemption to clear their 

swaps with unaffiliated counterparties (not located 

in the U.S.), to the extent such swaps are subject 

to the clearing requirement under section 2(h)(1) of 

the CEA, by complying with the requirements of a 

foreign jurisdiction’s clearing mandate, including 

any exception or exemption granted under the 

foreign clearing mandate, provided that the 

Commission determines that: (i) such foreign 

jurisdiction’s clearing mandate is comparable and 

comprehensive, but not necessarily identical, to the 

clearing requirement established under the CEA 

and part 50 of the Commission’s regulations, and 

(ii) the exception or exemption is determined to be 

comparable to an exception or exemption provided 

under the CEA or part 50 of the Commission’s 

regulations. See 17 CFR 50.52(b)(4)(i). 

substituted compliance is not available, 

for the reasons discussed below. 

As noted in section D above, the 

Dodd-Frank Act’s required clearing and 

swap processing requirements protect 

counterparties from the counterparty 

credit risk of their original 

counterparties, which in turn, protects 

against the accumulation of systemic 

risk because of the risk mitigation 

benefits offered by central clearing. 

Similarly, the trade execution and realtime public reporting requirements 

serve to promote both pre- and posttrade transparency which, in turn, 

enhance price discovery and decrease 

risk. Together, these requirements serve 

an essential role in protecting U.S. 

market participants and the general 

market against financial losses. The 

Commission cannot fully and 

responsibly fulfill its charge to protect 

the U.S. markets and market 

participants through a substituted 

compliance regime where one 

counterparty is a U.S. person. 

Accordingly, the Commission’s policy is 

to expect full compliance with the NonRegistrant Requirements relating to 

required clearing, trade execution, and 

real-time public reporting with regard to 

any swaps between non-registrants 

where one or both of the counterparties 

is a U.S. person. For substantially the 

same reasons, application of U.S. 

requirements in these transactions is a 

reasonable exercise of U.S. jurisdiction 

under principles of foreign relations 

law.606

Large Trader Reporting provides the 

Commission with data regarding large 

positions in swaps with a direct or 

indirect linkage to specified U.S.-listed 

physical commodity futures contracts, 

in order to enable the Commission to 

implement and conduct effective 

surveillance of these economically 

equivalent swaps and futures. To 

facilitate the monitoring of trading 

across the swaps and futures markets, 

swaps positions must be converted to 

futures equivalents for reporting 

purposes; reportable thresholds are also 

defined in terms of futures equivalents. 

As discussed in further detail in section 

G above, in light of the very specific 

interest of the Commission in 

conducting effective surveillance of 

markets in swaps that have been 

determined to be economically 

equivalent to U.S. listed physical 

commodity futures contracts, and given 

the anticipated impediments to 

obtaining directly comparable positional 

data through any foreign swap data 

reporting regime, the Commission’s 

policy is to construe CEA section 2(i) in 

a manner that would not recognize 

substituted compliance in lieu of 

compliance with Large Trader 

Reporting. 

As noted in section E, data reported 

under the SDR Reporting rules provide 

the Commission with information 

necessary to better understand and 

monitor concentrations of risk, as well 

as risk profiles of individual market 

participants. Swap data recordkeeping 

is an important component of an 

effective internal risk management 

process. Therefore, the Commission’s 

policy is that generally both SDR 

Reporting and swap data recordkeeping 

should apply in full where one of the 

counterparties to a swap between two 

non-registrants (non-swap dealers or 

non-MSPs) is a U.S. person. 

As noted above, the clearing of swaps 

through a DCO mitigates counterparty 

credit risk and collateralizes the credit 

exposures posed by swaps. Section 

2(h)(1) of the CEA requires a swap to be 

submitted for clearing to a registered 

DCO or a DCO that is exempt from 

registration under the CEA, if the 

Commission has determined that the 

swap is required to be cleared.607 The 

Commission has adopted a clearing 

requirement determination pursuant to 

the CEA and rules under part 50 of the 

Commission’s regulations such that 

certain classes of swaps are required to 

be cleared, unless counterparties to the 

swap qualify for an exception or 

exemption from clearing under the CEA 

or part 50 of the Commission’s 

regulations.608 In the final rules 

adopting the Inter-Affiliate Exemption, 

the Commission stated that a U.S. 

person that enters into any swap that is 

required to be cleared is subject to the 

clearing requirements of the CEA and 

part 50 of the Commission’s 

regulations.609 Accordingly, in the 

context of this Guidance, the 

Commission’s policy is that the clearing 

requirement under section 2(h)(1) and 

part 50 of the Commission’s regulations 

applies in full to a swap where at least 

one of the counterparties to the swap is 

a U.S. person, without substituted 

compliance available. But substituted 

compliance may be available with 

respect to the clearing requirement for 

swaps between, on the one hand, a U.S. 

swap dealer or U.S. MSP acting through 

its foreign branch or a non-U.S. person 

that is a guaranteed or conduit affiliate, 

and on the other hand, a non-U.S. swap 

dealer, non-U.S. MSP or other non-U.S. 

person. 

With respect to the clearing 

requirement, the Commission has 

previously addressed both the scope 

and process of a comparability 

determination, which also would apply 

to the extent that substituted 

compliance is applicable under this 

Guidance.610

As for the process for determining 

comparability of a foreign jurisdiction’s 

clearing mandate, the Commission has 

also previously stated that it will review 

the comparability and 

comprehensiveness of a foreign 

jurisdiction’s clearing mandate by 

reviewing: (i) The foreign jurisdiction’s 

laws and regulations with respect to its 

mandatory clearing regime (i.e., 

jurisdiction-specific review) and (ii) the 

foreign jurisdiction’s clearing 

determinations with respect to each 

class of swaps for which the 

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611The Commission further explained that 

comparability will not require a regime identical to 

the clearing framework established under the CEA 

and the Commission regulations. Rather, the 

Commission anticipates that it will make 

jurisdiction-specific comparability determinations 

by comparing the regulatory requirements of a 

foreign jurisdiction’s clearing regime with the 

requirements and objectives of the Dodd-Frank Act. 

The Commission further noted that it anticipates 

that the product-specific comparability 

determination will necessarily be made on the basis 

of whether the applicable swap is included in a 

class of swaps covered under Commission 

regulation 50.4. 

612The Commission’s part 20 regulations set forth 

large trader reporting rules for physical commodity 

swaps. See 76 FF 43851 (Jul. 22, 2011). Part 20 

requires routine swaps position reports from 

clearing organizations, clearing members and swap 

dealers, and establishes certain non-routine 

reporting requirements for large swaps traders. 

Among other things, part 20 requires that a 

reporting entity, as defined in Commission 

regulation 20.1, disclose the identity of the 

counterparty in respect of which positional 

information is being reported in large swap trader 

reports and associated filings. See 76 FR. 43851 at 

43863–4 n.11. 

613The Dodd-Frank Act added to the CEA 

provisions requiring the retention and reporting of 

data related to swap transactions. Section 727 of the 

Dodd-Frank Act added section 2(a)(13)(g), which 

requires that all swaps, whether cleared or 

uncleared, be reported to an SDR. Section 728 of 

the Dodd-Frank Act added section 21(b), which 

directs the Commission to prescribe standards for 

swap data recordkeeping and reporting. Section 723 

of the Dodd-Frank Act added section 2(h)(5), which 

addresses the reporting of swap data for swaps 

executed before the enactment of the Dodd-Frank 

Act and swaps executed on or after the date of its 

enactment. The Commission’s swap data reporting 

and recordkeeping requirements are found in part 

45, which establishes swap data recordkeeping and 

SDR reporting requirements; and part 46, which 

establishes swap data recordkeeping and SDR 

reporting requirements for pre-enactment and 

transition swaps (collectively, ‘‘historical swaps’’). 

See 77 FR 2136 (Jan. 13, 2012) (part 45); 77 FR 

35200 (June 12, 2012) (part 46). Under both part 45 

and part 46 (collectively, the ‘‘swap data reporting 

rules’’) reporting parties have swap data reporting 

obligations. The swap data reporting rules further 

prescribe certain data fields that must be included 

in swap data reporting. See Appendix 1 to part 45; 

Appendix 1 to part 46. For all swaps subject to the 

Commission’s jurisdiction, each counterparty must 

be identified by means of a single legal entity 

identifier (‘‘LEI’’) in all swap data reporting 

pursuant to parts 45 and 46. A reporting 

counterparty, as defined in Commission regulations 

45.1 and 46.1, respectively, has obligations that 

include providing certain data to the SDR relating 

to the primary economic terms (‘‘PET’’) of the swap, 

including the LEI of the non-reporting counterparty. 

614The Commission clarifies that the trading 

mandate under CEA section 2(h)(8)(A) is satisfied 

by trading on a registered DCM or SEF or a SEF that 

is exempt from registration. 

615The Commission clarifies that the trading 

mandate under CEA section 2(h)(8)(A) is satisfied 

by trading on a registered FBOT. 

616See the Proposed Guidance, 77 FR 41234– 

41235. 

617See id. at 41234 n. 139, 41235. 

Commission has issued a clearing 

determination under Commission 

regulation 50.4 (i.e., product-specific 

review).611 In determining whether an 

exemption or exception under a 

comparable foreign mandate is 

comparable to an exception or 

exemption under the CEA or part 50, the 

Commission anticipates that it would 

review, for comparability purposes, the 

foreign jurisdiction’s laws and 

regulations with respect to its 

mandatory clearing regime, as well as 

the relevant exception or exemption, 

and would exercise broad discretion to 

determine whether the requirements 

and objectives of such exemption are 

consistent with those under the 

comparable foreign clearing regime. 

The Commission is also of the view 

that where a swap is executed 

anonymously on a registered DCM or 

SEF between two non-registrants and 

cleared by a registered DCO, and one (or 

both) of the counterparties to the swap 

is a U.S. person, neither party to the 

swap should be required to comply with 

the Non-Registrant Requirements that 

otherwise apply to the swap, with the 

exception of Large Trader Reporting,612

SDR Reporting, and swap data 

recordkeeping.613 The Commission 

notes that in this case, the DCM or SEF 

will fulfill the required clearing, trade 

execution,614 and real-time public 

reporting requirements that apply to the 

swap. 

Further, the Commission is of the 

view that where a swap is executed 

anonymously between two nonregistrants on a registered FBOT and 

cleared and one (or both) of the 

counterparties to the swap is a U.S. 

person, neither party to the swap (as is 

the case when the swap is executed 

anonymously on a DCM) should be 

required to comply with the NonRegistrant Requirements that otherwise 

apply to the swap, with the exception of 

Large Trader Reporting, SDR Reporting 

and swap data recordkeeping. The 

Commission notes that in this case, the 

registered FBOT, as would the DCM, 

will fulfill the required clearing and 

trade execution requirements 615 that 

apply to the swap but not, without 

further action, the real-time public 

reporting requirements. 

The Commission expects that 

derivatives markets and regulatory 

regimes will continue to evolve in the 

future. In order to ensure a level playing 

field, promote participation in 

transparent markets, and promote 

market efficiency, the Commission will, 

through staff no action letters, extend 

appropriate time-limited transitional 

relief to certain European Unionregulated multilateral trading facilities 

(MTFs), in the event that the 

Commission’s trade execution 

requirement is triggered before March 

15, 2014. Such relief would be available 

through March 15th for MTFs that have 

multilateral trading schemes, a 

sufficient level of pre- and post-trade 

price transparency, non-discriminatory 

access by market participants, and an 

appropriate level of oversight. In 

addition, the Commission will consult 

with the European Commission in 

giving consideration to extending 

regulatory relief to European Unionregulated trading platforms that are 

subject to requirements that achieve 

regulatory outcomes that are comparable 

to those achieved by the requirements 

for SEFs. Both parties will assess 

progress in January 2014. 

2. Swaps Between Non-Registrants That 

Are Both Non-U.S. Persons 

As noted above, where a swap is 

between two non-U.S. persons and 

neither counterparty is required to 

register as a swap dealer or MSP, the 

Commission proposed interpreting CEA 

section 2(i) so as not to apply the NonRegistrant Requirements,616 with the 

exception of Large Trader Reporting.617

Section a discusses the Commission’s 

policy on application of Large Trader 

Reporting to swaps between two nonregistrants that are not U.S. persons. 

Section b discusses the application of 

the other Non-Registrant Requirements 

to swaps between two non-registrants 

that are not U.S. persons, where each of 

the counterparties to the swap is a 

guaranteed or conduit affiliate, and the 

availability of substituted compliance 

for the parties to such swaps. Section c 

discusses the Commission’s policy on 

application of the Non-Registrant 

Requirements other than Large Trader 

Reporting to swaps between nonregistrants that are not U.S. persons 

where neither or only one of the 

counterparties is a guaranteed or 

conduit affiliate. 

a. Large Trader Reporting 

Large Trader Reporting requires 

routine positional reports from clearing 

members in addition to clearing 

organizations and swap dealers. As is 

the case with swap dealers, routine 

reports are required from clearing 

members to the extent that they hold 

significant positions in the swaps 

subject to Large Trader Reporting— 

swaps that are directly or indirectly 

linked to specified U.S.-listed physical 

commodity futures contracts. Routine 

reporting provides essential visibility 

into the trading activity of large market 

participants, which enables the 

Commission to conduct effective 

surveillance of markets in swaps and 

futures that have been determined to be 

economically equivalent. Given the 

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618To the extent that they transact in the physical 

commodity swaps covered by the Commission’s 

Large Trader Reporting rules, non-U.S. clearing 

members also should maintain the records required 

by such rules. 

619As noted above, this Guidance uses the term 

‘‘guaranteed or conduit affiliate’’ to refer to a nonU.S. person that is guaranteed by a U.S. person or 

that is an affiliate conduit. 

620The Commission proposed to interpret section 

2(i) so that the Non-Registrant Requirements would 

not apply to swaps between two non-registrants 

(whether or not one or more counterparties was 

guaranteed by a U.S. person), with the exception of 

Large Trader Reporting. The Commission noted in 

the Proposed Guidance that it intended to review 

the issue of affiliate conduits. See Proposed 

Guidance, 77 FR 1234–41235. 

linkage of the swaps covered by Large 

Trader Reporting to U.S. futures 

markets, the Commission believes that 

any non-U.S. clearing member that 

holds positions in such swaps that are 

significant enough to trigger routine 

reporting obligations is engaged in 

activities that have a direct and 

significant connection with activities in, 

or effect on, commerce of the United 

States. Consistent with the Proposed 

Guidance, the Commission’s policy, in 

light of its interpretation of CEA section 

2(i), is that any such non-U.S. clearing 

member should report all reportable 

positions to the Commission.618

Large Trader Reporting also 

establishes recordkeeping requirements 

for traders with significant positions in 

the covered physical commodity swaps. 

Given the vital role that Large Trader 

Reporting plays in ensuring that the 

Commission has access to 

comprehensive data regarding trading 

activity in swaps linked to U.S. futures, 

the Commission’s policy, in light of its 

interpretation of CEA section 2(i), is that 

non-U.S. persons with positions that 

meet the prescribed recordkeeping 

thresholds should comply with the 

prescribed recordkeeping requirements. 

The Commission notes that traders, 

which are not swap dealers or clearing 

members with routine Large Trader 

Reporting obligations, may generally 

keep books and records regarding their 

transactions in the covered physical 

commodity swaps and produce them for 

inspection by the Commission in the 

record retention format that such traders 

have developed in the normal course of 

their business operations. 

b. Swaps Where Each of The 

Counterparties Is Either a Guaranteed or 

Conduit Affiliate 

In contrast to the Proposed Guidance, 

where a swap is between two nonregistrants that are not U.S. persons, and 

each of the counterparties to the swap 

is a guaranteed or conduit affiliate,619

the parties to the swap generally should 

be expected to comply with the NonRegistrant Requirements with respect to 

the transaction. However, where at least 

one of the parties to the swap is an 

‘‘affiliate conduit,’’ the Commission 

would generally expect the parties to 

the swap only to comply with (to the 

extent that the Inter-Affiliate Exemption 

is elected), the conditions of the InterAffiliate Exemption, including the 

treatment of outward-facing swaps 

condition in Commission regulation 

50.52(b)(4)(i). In addition, the part 43 

real-time reporting requirements must 

be satisfied. 

The Commission has not interpreted 

CEA section 2(i) so as to include a 

guaranteed or conduit affiliate in the 

interpretation of the term ‘‘U.S. person’’ 

solely because of the guarantee or 

affiliation. Where each of the 

counterparties to the swap are nonregistrants that are guaranteed or 

conduit affiliates, the Commission 

believes that the risks to U.S. persons 

and to the U.S. financial system 

sufficiently increase so that the 

additional measure of applying the NonRegistrant Requirements to the swap is 

warranted (but with substituted 

compliance available, to the extent 

applicable).620 The Commission notes 

that in the case of guarantees by U.S. 

persons, if there is a default by the nonU.S. person, the U.S. guarantor 

generally would be held responsible to 

settle the obligations. In the case of 

affiliate conduits, a non-U.S. affiliate 

could effectively operate as a conduit 

for the U.S. person, and could be used 

to execute swaps with counterparties in 

foreign jurisdictions, outside the DoddFrank Act regulatory regime. 

Therefore, where a swap is between 

two non-registrants that are guaranteed 

or conduit affiliates, the Commission 

believes that the swap has a ‘‘direct and 

significant connection with activities in, 

or effect on, commerce of the United 

States’’ within the meaning of CEA 

section 2(i) so that certain Entity-Level 

and Transaction-Level Requirements 

would apply to the swap counterparties. 

Consistent with section 2(i), however, 

the Commission’s policy generally is to 

make the parties to the swap eligible for 

substituted compliance (except with 

regard to Large Trader Reporting, and 

provided that SDR Reporting would be 

eligible for substituted compliance only 

if the Commission has direct access to 

all of the reported swap data elements 

that are stored at a foreign trade 

repository). 

c. Swaps Where Neither or Only One of 

the Parties is a Guaranteed or Conduit 

Affiliate 

With respect to swaps between two 

non-registrants where neither or only 

one party is a guaranteed or conduit 

affiliate, the Commission’s policy is that 

the parties to the swap generally should 

not be expected to comply with the 

Non-Registrant Requirements, except as 

described below. 

As discussed above, where a 

counterparty to a swap is a guaranteed 

or conduit affiliate, the risks to U.S. 

persons and to the U.S. financial system 

increase. In the case of guarantees by 

U.S. persons, if there is a default by the 

non-U.S. person, the U.S. guarantor 

would be held responsible to settle the 

obligations. In the case of affiliate 

conduits, a non-U.S. affiliate could 

effectively operate as a ‘‘conduit’’ for the 

U.S. person, and could be used to 

execute swaps with counterparties in 

foreign jurisdictions, outside the DoddFrank Act regulatory regime. 

Nevertheless, the Commission also 

recognizes that foreign jurisdictions may 

have an interest in regulating swaps 

between two non-registrants where both 

counterparties to the swap are non-U.S. 

persons. Therefore, consistent with 

international comity principles, the 

Commission would generally expect the 

parties to the swap only to comply with 

(to the extent that the Inter-Affiliate 

Exemption is elected), the conditions of 

the Inter-Affiliate Exemption, including 

the treatment of outward-facing swaps 

condition in Commission regulation 

50.52(b)(4)(i), and Large Trader 

Reporting. The Commission believes 

that this policy strikes the right balance 

between U.S. interests in regulating 

such a swap and the interest of foreign 

regulators. 

V. Appendix A—The Entity-Level 

Requirements 

A. First Category of Entity-Level 

Requirements 

The First Category of Entity-Level 

Requirements includes capital 

adequacy, chief compliance officer, risk 

management, and swap data 

recordkeeping (except certain aspects of 

swap data recordkeeping relating to 

complaints and sales materials). 

1. Capital Adequacy 

Section 4s(e)(2)(B) of the CEA 

specifically directs the Commission to 

set capital requirements for swap 

dealers and MSPs that are not subject to 

the capital requirements of U.S. 

prudential regulators (hereinafter 

referred to as ‘‘non-bank swap dealers or 

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621See 7 U.S.C. 6s(e)(2)(B). Section 4s(e) of the 

CEA explicitly requires the adoption of rules 

establishing capital and margin requirements for 

swap dealers and MSPs, and applies a bifurcated 

approach that requires each swap dealer and MSP 

for which there is a U.S. prudential regulator to 

meet the capital and margin requirements 

established by the applicable prudential regulator, 

and each swap dealer and MSP for which there is 

no prudential regulator to comply with the 

Commission’s capital and margin regulations. See 7 

U.S.C. 6s(e). Further, systemically important 

financial institutions (‘‘SIFIs’’) that are not FCMs 

would be exempt from the Commission’s capital 

requirements, and would comply instead with 

Federal Reserve Board requirements applicable to 

SIFIs, while nonbank (and non-FCM) subsidiaries of 

U.S. bank holding companies would calculate their 

Commission capital requirement using the same 

methodology specified in Federal Reserve Board 

regulations applicable to the bank holding 

company, as if the subsidiary itself were a bank 

holding company. The term ‘‘prudential regulator’’ 

is defined in CEA section 1a(39) as the Board of 

Governors of the Federal Reserve System, the Office 

of the Comptroller of the Currency, the Federal 

Deposit Insurance Corporation, the Farm Credit 

Administration, and the Federal Housing Finance 

Agency. See 7 U.S.C. 1a(39). In addition, in the 

proposed capital regulations for swap dealers and 

MSPs, the Commission solicited comment regarding 

whether it would be appropriate to permit swap 

dealers and MSPs to use internal models for 

computing market risk and counterparty credit risk 

charges for capital purposes if such models had 

been approved by a foreign regulatory authority and 

were subject to periodic assessment by such foreign 

regulatory authority. See Proposed Capital 

Requirements, 76 FR 27802. 

622See 7 U.S.C. 6s(e)(3)(A). 

623See 7 U.S.C. 6s(e). See also Proposed Capital 

Requirements, 76 FR 27802. ‘‘The Commission’s 

capital proposal for [swap dealers] and MSPs 

includes a minimum dollar level of $20 million. A 

non-bank [swap dealer] or MSP that is part of a U.S. 

bank holding company would be required to 

maintain a minimum of $20 million of Tier 1 

capital as measured under the capital rules of the 

Federal Reserve Board. [A swap dealer] or MSP that 

also is registered as an FCM would be required to 

maintain a minimum of $20 million of adjusted net 

capital as defined under [proposed] section 1.17. In 

addition, an [swap dealer] or MSP that is not part 

of a U.S. bank holding company or registered as an 

FCM would be required to maintain a minimum of 

$20 million of tangible net equity, plus the amount 

of the [swap dealer’s] or MSP’s market risk 

exposure and OTC counterparty credit risk 

exposure.’’ See id. at 27817. 

624See 7 U.S.C. 6s(k). 625 7 U.S.C. 6s(j). 

626See Final Swap Dealer and MSP 

Recordkeeping Rule, 77 FR 20128 (relating to risk 

management program, monitoring of position 

limits, business continuity and disaster recovery, 

conflicts of interest policies and procedures, and 

general information availability, respectively). 

627Customer Documentation Rule, 77 FR 21278. 

Also, swap dealers must comply with Commission 

regulation 23.608, which prohibits swap dealers 

providing clearing services to customers from 

entering into agreements that would: (i) Disclose the 

identity of a customer’s original executing 

counterparty; (ii) limit the number of counterparties 

a customer may trade with; (iii) impose 

counterparty-based position limits; (iv) impair a 

customer’s access to execution of a trade on terms 

that have a reasonable relationship to the best terms 

available; or (v) prevent compliance with specified 

time frames for acceptance of trades into clearing. 

628 7 U.S.C. 6s(f)(1)(B). 629 7 U.S.C. 6s(g)(1). 630 17 CFR part 46; Proposed Data Rules, 76 FR 

22833. 631 7 U.S.C. 2(a)(13)(G). 

MSPs’’).621 With respect to the use of 

swaps that are not cleared, these 

requirements must: ‘‘(1) [h]elp ensure 

the safety and soundness of the swap 

dealer or major swap participant; and 

(2) [be] appropriate for the risk 

associated with the non-cleared swaps 

held as a swap dealer or major swap 

participant.’’ 622 Pursuant to section 

4s(e)(3), the Commission proposed 

regulations, which would require nonbank swap dealers and MSPs to hold a 

minimum level of adjusted net capital 

(i.e., ‘‘regulatory capital’’) based on 

whether the non-bank swap dealer or 

MSP is: (i) also a FCM; (ii) not an FCM, 

but is a non-bank subsidiary of a bank 

holding company; or (iii) neither an 

FCM nor a non-bank subsidiary of a 

bank holding company.623 The primary 

purpose of the capital requirement is to 

reduce the likelihood and cost of a swap 

dealer’s or MSP’s default by requiring a 

financial cushion that can absorb losses 

in the event of the firm’s default. 

2. Chief Compliance Officer 

Section 4s(k) requires that each swap 

dealer and MSP designate an individual 

to serve as its chief compliance officer 

(‘‘CCO’’) and specifies certain duties of 

the CCO.624 Pursuant to section 4s(k), 

the Commission adopted regulation 3.3, 

which requires swap dealers and MSPs 

to designate a CCO who would be 

responsible for administering the firm’s 

compliance policies and procedures, 

reporting directly to the board of 

directors or a senior officer of the swap 

dealer or MSP, as well as preparing and 

filing with the Commission a certified 

report of compliance with the CEA. The 

chief compliance function is an integral 

element of a firm’s risk management and 

oversight and the Commission’s effort to 

foster a strong culture of compliance 

within swap dealers and MSPs. 

3. Risk Management 

Section 4s(j) of the CEA requires each 

swap dealer and MSP to establish 

internal policies and procedures 

designed to, among other things, 

address risk management, monitor 

compliance with position limits, 

prevent conflicts of interest, and 

promote diligent supervision, as well as 

maintain business continuity and 

disaster recovery programs.625 The 

Commission adopted implementing 

regulations (23.600, 23.601, 23.602, 

23.603, 23.605, and 23.606).626 The 

Commission also adopted regulation 

23.609, which requires certain risk 

management procedures for swap 

dealers or MSPs that are clearing 

members of a derivatives clearing 

organization (‘‘DCO’’).627 Collectively, 

these requirements help to establish a 

robust and comprehensive internal risk 

management program for swap dealers 

and MSPs, which is critical to effective 

systemic risk management for the 

overall swaps market. 

i. Swap Data Recordkeeping (Except 

Certain Aspects of Swap Data 

Recordkeeping Relating to Complaints 

and Sales Materials) 

CEA section 4s(f)(1)(B) requires swap 

dealers and MSPs to keep books and 

records for all activities related to their 

business.628 Sections 4s(g)(1) and (4) 

require swap dealers and MSPs to 

maintain trading records for each swap 

and all related records, as well as a 

complete audit trail for comprehensive 

trade reconstructions.629 Pursuant to 

these provisions, the Commission 

adopted regulations 23.201and 23.203, 

which require swap dealers and MSPs 

to keep records including complete 

transaction and position information for 

all swap activities, including 

documentation on which trade 

information is originally recorded. 

Pursuant to regulation 23.203, records of 

swaps must be maintained for the 

duration of the swap plus 5 years, and 

voice recordings for 1 year, and records 

must be ‘‘readily accessible’’ for the first 

2 years of the 5 year retention period. 

Swap dealers and MSPs also must 

comply with Parts 43, 45 and 46 of the 

Commission’s regulations, which, 

respectively, address the data 

recordkeeping and reporting 

requirements for all swaps subject to the 

Commission’s jurisdiction, including 

swaps entered into before the date of 

enactment of the Dodd-Frank Act (‘‘preenactment swaps’’) and swaps entered 

into on or after the date of enactment of 

the Dodd-Frank Act but prior to the 

compliance date of the swap data 

reporting rules (‘‘transition swaps’’).630

B. Second Category of Entity-Level 

Requirements 

The Second Category of Entity-Level 

Requirements includes SDR Reporting, 

certain aspects of swap data 

recordkeeping relating to complaints 

and marketing and sales materials under 

Commission regulations 23.201(b)(3) 

and 23.201(b)(4) and Large Trader 

Reporting. 

1. SDR Reporting 

CEA section 2(a)(13)(G) requires all 

swaps, whether cleared or uncleared, to 

be reported to a registered SDR.631 CEA 

section 21 requires SDRs to collect and 

maintain data related to swaps as 

prescribed by the Commission, and to 

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632 7 U.S.C. 24a. 

633 7 U.S.C. 6s(f)(1). 

634 7 U.S.C. 6s(h)(1). See 7 U.S.C. 6s(h)(3). 

635Final Swap Dealer and MSP Recordkeeping 

Rule, 77 FR 20128. 

636 17 CFR 23.201(b)(3)(i). 

637 17 CFR 23.201(b)(4). 

638 7 U.S.C. 6t. 

639Large Trader Reporting for Physical 

Commodity Swaps, 76 FR 43851. The rules require 

routine position reporting by clearing organizations, 

as well as clearing members and swap dealers with 

reportable positions in the covered physical 

commodity swaps. The rules also establish 

recordkeeping requirements for clearing 

organizations, clearing members and swap dealers, 

as well as traders with positions in the covered 

physical commodity swaps that exceed a prescribed 

threshold. In general, the rules apply to swaps that 

are linked, directly or indirectly, to either the price 

of any of the 46 U.S.-listed physical commodity 

futures contracts the Commission enumerates 

(Covered Futures Contracts) or the price of the 

physical commodity at the delivery location of any 

of the Covered Futures Contracts. 

640 7 U.S.C. 2(h)(1), (7). 

641 77 FR 72284. 

make such data electronically available 

to particular regulators under specified 

conditions related to confidentiality.632

Part 45 of the Commission’s regulations 

(and Appendix 1 thereto) sets forth the 

specific swap data that must be reported 

to a registered SDR, along with 

attendant recordkeeping requirements; 

and part 46 addresses recordkeeping 

and reporting requirements for preenactment and transition swaps 

(‘‘historical swaps’’). The fundamental 

goal of the part 45 rules is to ensure that 

complete data concerning all swaps 

subject to the Commission’s jurisdiction 

is maintained in SDRs where it will be 

available to the Commission and other 

financial regulators for fulfillment of 

their various regulatory mandates, 

including systemic risk mitigation, 

market monitoring and market abuse 

prevention. Part 46 supports similar 

goals with respect to pre-enactment and 

transition swaps and ensures that data 

needed by regulators concerning 

‘‘historical’’ swaps is available to 

regulators through SDRs. Among other 

things, data reported to SDRs will 

enhance the Commission’s 

understanding of concentrations of risks 

within the market, as well as promote a 

more effective monitoring of risk 

profiles of market participants in the 

swaps market. The Commission also 

believes that there are benefits that will 

accrue to swap dealers and MSPs as a 

result of the timely reporting of 

comprehensive swap transaction data 

and consistent data standards for 

recordkeeping, among other things. 

Such benefits include more robust risk 

monitoring and management 

capabilities for swap dealers and MSPs, 

which in turn will improve the 

monitoring of their current swaps 

market positions. 

2. Swap Data Recordkeeping Relating to 

Complaints and Marketing and Sales 

Materials 

CEA section 4s(f)(1) requires swap 

dealers and MSPs to ‘‘make such reports 

as are required by the Commission by 

rule or regulation regarding the 

transactions and positions and financial 

condition of the registered swap dealer 

or major swap participant.’’ 633

Additionally, CEA section 4s(h) requires 

swap dealers and MSPs to ‘‘conform 

with such business conduct standards 

. . . as may be prescribed by the 

Commission by rule or regulation.’’ 634

Pursuant to those authorities, the 

Commission promulgated final rules 

that set forth certain reporting and 

recordkeeping for swap dealers and 

MSPs.635 Commission Regulation 

23.201 states that ‘‘[e]ach swap dealer 

and major swap participant shall keep 

full, complete, and systematic records of 

all activities related to its business as a 

swap dealer or major swap participant.’’ 

Such records must include, among other 

things, ‘‘[a] record of each complaint 

received by the swap dealer or major 

swap participant concerning any 

partner, member, officer, employee, or 

agent,’’ 636 as well as ‘‘[a]ll marketing 

and sales presentations, advertisements, 

literature, and communications.’’ 637

3. Physical Commodity Large Swaps 

Trader Reporting (Large Trader 

Reporting) 

CEA section 4t 638 authorizes the 

Commission to establish a large trader 

reporting system for significant price 

discovery swaps (of which the 

economically equivalent swaps subject 

to the Commission’s part 20 rules are a 

subset). Pursuant thereto, the 

Commission adopted its Large Trader 

Reporting rules (part 20 of the 

Commission regulations), which require 

routine reports from swap dealers, 

among other entities, that hold 

significant positions in swaps that are 

linked, directly or indirectly, to a 

prescribed list of U.S.-listed physical 

commodity futures contracts.639

Additionally, Large Trader Reporting 

requires that swap dealers, among other 

entities, comply with certain 

recordkeeping obligations. 

VI. Appendix B—The TransactionLevel Requirements 

The Transaction-Level Requirements 

cover a range of Dodd-Frank 

requirements: some of the requirements 

more directly address financial 

protection of swap dealers (or MSPs) 

and their counterparties; others address 

more directly market efficiency and/or 

price discovery. Further, some of the 

Transaction-Level Requirements can be 

classified as Entity-Level Requirements 

and applied on a firm-wide basis across 

all swaps or activities. Nevertheless, in 

the interest of comity principles, the 

Commission believes that the 

Transaction-Level Requirements may be 

applied on a transaction-by-transaction 

basis. 

A. Category A: Risk Mitigation and 

Transparency 

1. Required Clearing and Swap 

Processing 

Section 2(h)(1) of the CEA requires a 

swap to be submitted for clearing to a 

DCO if the Commission has determined 

that the swap is required to be cleared, 

unless one of the parties to the swap is 

eligible for an exception from the 

clearing requirement and elects not to 

clear the swap.640 Clearing via a DCO 

mitigates the counterparty credit risk 

between swap dealers or MSPs and their 

counterparties. 

Commission regulations 

implementing the first designations of 

swaps for required clearing were 

published in the Federal Register on 

December 13, 2012.641 Under 

Commission regulation 50.2, all persons 

executing a swap that is included in a 

class of swaps identified under 

Commission regulation 50.4 must 

submit such swap to an eligible 

derivatives clearing organization (DCO) 

for clearing as soon as technologically 

practicable after clearing, but in any 

event by the end of the day of execution. 

Regulation 50.4 establishes required 

clearing for certain classes of swaps. 

Currently, those classes include, for 

credit default swaps: Specified series of 

untranched North American CDX 

indices and European iTraxx indices; 

and for interest rate swaps: Fixed-tofloating swaps, basis swaps, forward 

rate agreements referencing U.S. Dollar, 

Euro, Sterling, and Yen, and overnight 

index swaps referencing U.S. Dollar, 

Euro, and Sterling. Each of the six 

classes is further defined in Commission 

regulation 50.4. Swaps that have the 

specifications identified in the 

regulation are required to be cleared and 

must be cleared pursuant to the rules of 

any eligible DCO unless an exception or 

exemption specified in the CEA or the 

Commission’s regulations applies. 

Generally, if a swap is subject to 

Section 2(h)(1)(A) of the CEA and part 

50 of the Commission’s regulations, it 

must be cleared through an eligible 

DCO, unless: (i) One of the 

counterparties is eligible for and elects 

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642See End-User Exception to the Clearing 

Requirement for Swaps, 77 FR 42560 (Jul. 19, 2012). 

643See Final Customer Documentation Rules, 77 

FR 21278. 

644See section IV.H, supra, regarding the 

application of required clearing rules to market 

participants that are not registered as swap dealers 

or MSPs, including the circumstances under which 

the parties to such swaps would be eligible for 

substituted compliance. 

645See 7 U.S.C. 6s(e). See also Proposed Margin 

Requirements, 76 FR at 23733–23740. Section 4s(e) 

explicitly requires the adoption of rules establishing 

margin requirements for swap dealers and MSPs, 

and applies a bifurcated approach that requires 

each swap dealer and MSP for which there is a 

prudential regulator to meet the margin 

requirements established by the applicable 

prudential regulator, and each swap dealer and 

MSP for which there is no prudential regulator to 

comply with the Commission’s margin regulations. 

In contrast, the segregation requirements in section 

4s(1) do not use a bifurcated approach—that is, all 

swap dealers and MSPs are subject to the 

Commission’s rule regarding notice and third party 

custodians for margin collected for uncleared 

swaps. 

646See 7 U.S.C. 2(h)(8). 

647 78 FR 33606. 

648See 7 U.S.C. 6s(i). 

649See Final Confirmation Rules, 77 FR 55904. 

650The requirements under section 4s(i) relating 

to trade confirmations is a Transaction-Level 

Requirement. Accordingly, Commission regulation 

23.504(b)(2) requires a swap dealer’s and MSP’s 

swap trading relationship documentation to include 

all confirmations of swaps, will apply on a 

transaction-by-transaction basis. 

651See Final Confirmation Rules, 77 FR at 55964. 

652See id. 

653For example, the reduced transaction count 

may decrease operational risk as there are fewer 

trades to maintain, process, and settle. 

the End-User Exception under 

Commission regulation 50.50; 642 or (ii) 

both counterparties are eligible for and 

elect an Inter-Affiliate Exemption under 

Commission regulation 50.52. To elect 

either the end-user exception or the 

Inter-Affiliate Exemption, the electing 

party or parties and the swap must meet 

certain requirements set forth in the 

regulations. 

Closely connected with the clearing 

requirement are the following swap 

processing requirements: (i) 

Commission regulation 23.506, which 

requires swap dealers and MSPs to 

submit swaps promptly for clearing; and 

(ii) Commission regulations 23.610 and 

39.12, which establish certain standards 

for swap processing by DCOs and/or 

swap dealers and MSPs that are clearing 

members of a DCO.643 Together, 

required clearing and swap processing 

requirements promote safety and 

soundness of swap dealers and MSPs, 

and mitigate the credit risk posed by 

bilateral swaps between swap dealers or 

MSPs and their counterparties.644

2. Margin and Segregation Requirements 

for Uncleared Swaps 

Section 4s(e) of the CEA requires the 

Commission to set margin requirements 

for swap dealers and MSPs that trade in 

swaps that are not cleared.645 The 

margin requirements ensure that 

outstanding current and potential future 

risk exposures between swap dealers 

and their counterparties are 

collateralized, thereby reducing the 

possibility that swap dealers or MSPs 

take on excessive risks without having 

adequate financial backing to fulfill 

their obligations under the uncleared 

swap. In addition, with respect to swaps 

that are not submitted for clearing, 

section 4s(l) requires that a swap dealer 

or MSP notify the counterparty of its 

right to request that funds provided as 

margin be segregated, and upon such 

request, to segregate the funds with a 

third-party custodian for the benefit of 

the counterparty. In this way, the 

segregation requirement enhances the 

protections offered through margining 

uncleared swaps and thereby provides 

additional financial protection to 

counterparties. The Commission is 

working with foreign and domestic 

regulators to develop and finalize 

appropriate regulations for margin and 

segregation requirements. 

3. Trade Execution 

Integrally linked to the clearing 

requirement is the trade execution 

requirement, which is intended to bring 

the trading of mandatorily cleared 

swaps that are made available to trade 

onto regulated exchanges or execution 

facilities. Specifically, section 2(h)(8) of 

the CEA provides that unless a clearing 

exception applies and is elected, a swap 

that is subject to a clearing requirement 

must be executed on a DCM or SEF, 

unless no such DCM or SEF makes the 

swap available to trade.646 Commission 

regulations implementing the process 

for a DCM or SEF to make a swap 

available to trade were published in the 

Federal Register on June 4, 2013.647

Under Commission regulations 37.10 

and 38.12, respectively, a SEF or DCM 

may submit a determination for 

Commission review that a mandatorily 

cleared swap is available to trade based 

on enumerated factors. By requiring the 

trades of mandatorily cleared swaps that 

are made available to trade to be 

executed on an exchange or an 

execution facility—each with its 

attendant pre- and post-trade 

transparency and safeguards to ensure 

market integrity—the trade execution 

requirement furthers the statutory goals 

of financial stability, market efficiency, 

and enhanced transparency. 

4. Swap Trading Relationship 

Documentation 

CEA section 4s(i) requires each swap 

dealer and MSP to conform to 

Commission standards for the timely 

and accurate confirmation, processing, 

netting, documentation and valuation of 

swaps.648 Pursuant thereto, Commission 

regulation 23.504(a) requires swap 

dealers and MSPs to ‘‘establish, 

maintain and enforce written policies 

and procedures’’ to ensure that the swap 

dealer or MSP executes written swap 

trading relationship documentation.649

Under Commission regulation 23.504, 

the swap trading relationship 

documentation must include, among 

other things: all terms governing the 

trading relationship between the swap 

dealer or MSP and its counterparty; 

credit support arrangements; investment 

and re-hypothecation terms for assets 

used as margin for uncleared swaps; and 

custodial arrangements.650 Further, the 

swap trading relationship 

documentation requirement applies to 

all swaps with registered swap dealers 

and MSPs. In addition, Commission 

regulation 23.505 requires swap dealers 

and MSPs to document certain 

information in connection with swaps 

for which exceptions from required 

clearing are elected.651 A robust swap 

documentation standard may promote 

standardization of documents and 

transactions, which are key conditions 

for central clearing, and lead to other 

operational efficiencies, including 

improved valuation and risk 

management. 

5. Portfolio Reconciliation and 

Compression 

CEA section 4s(i) directs the 

Commission to prescribe regulations for 

the timely and accurate processing and 

netting of all swaps entered into by 

swap dealers and MSPs. Pursuant to 

CEA section 4s(i), the Commission 

adopted regulations (23.502 and 

23.503), which require swap dealers and 

MSPs to perform portfolio reconciliation 

and compression, respectively, for all 

swaps.652 Portfolio reconciliation is a 

post-execution risk management tool to 

ensure accurate confirmation of a 

swap’s terms and to identify and resolve 

any discrepancies between 

counterparties regarding the valuation 

of the swap. Portfolio compression is a 

post-trade processing and netting 

mechanism that is intended to ensure 

timely, accurate processing and netting 

of swaps.653 Regulation 23.503 requires 

all swap dealers and MSPs to participate 

in bilateral compression exercises and/ 

or multilateral portfolio compression 

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45368 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

654See 17 CFR 23.503(c); Confirmation NPRM, 75 

FR 81519. 

655See 7 U.S.C. 2(a)(13). See also Real-Time 

Reporting Rule, 77 FR 1183. 

656Part 43 defines a ‘‘publicly reportable swap 

transaction’’ as: (i) Any swap that is an arm’s-length 

transaction between two parties that results in a 

corresponding change in the market risk position 

between the two parties; or (ii) any termination, 

assignment, novation, exchange, transfer, 

amendment, conveyance, or extinguishing of rights 

or obligations of a swap that changes the pricing of 

a swap. See Real-Time Reporting Rule, 77 FR 1182. 

Additionally, the Commission adopted regulation 

23.205, which directs swap dealers and MSPs to 

undertake such reporting and to have the electronic 

systems and procedures necessary to transmit 

electronically all information and data required to 

be reported in accordance with part 43. See Final 

Swap Dealer and MSP Recordkeeping Rule, 77 FR 

20205. 

657See Real-Time Reporting Rule, 77 FR 1183. 

658 7 U.S.C. 6s(i). 

659See Final Confirmation Rules, 77 FR 55904. 

660 In addition, the Commission notes that 

regulation 23.504(b)(2) requires that the swap 

trading relationship documentation of swap dealers 

and MSPs must include all confirmations of swap 

transactions. 

661See Final Swap Dealer and MSP 

Recordkeeping Rule, 77 FR 20128. 

662See 7 U.S.C. 6s(h). See also External Business 

Conduct Rules, 77 FR 9822–9829. 

exercises conducted by a third party.654

The rule also requires policies and 

procedures for engaging in such 

exercises for uncleared swaps with nonswap dealers and non-MSPs upon 

request. Further, participation in 

multilateral portfolio compression 

exercises is mandatory for dealer-todealer trades. 

6. Real-Time Public Reporting 

Section 2(a)(13) of the CEA also 

directs the Commission to promulgate 

rules providing for the public 

availability of swap transaction and 

pricing data on a real-time basis.655 In 

accordance with this mandate, the 

Commission promulgated part 43 of its 

regulations, which provide that all 

‘‘publicly reportable swap transactions’’ 

must be reported and publicly 

disseminated, and which establish the 

method, manner, timing and particular 

transaction and pricing data that must 

be reported by parties to a swap 

transaction.656 The real-time 

dissemination of swap transaction and 

pricing data supports the fairness and 

efficiency of markets and increases 

transparency, which in turn improves 

price discovery and decreases risk (e.g., 

liquidity risk).657

7. Trade Confirmation 

Section 4s(i) of the CEA 658 requires 

that each swap dealer and MSP must 

comply with the Commission’s 

regulations prescribing timely and 

accurate confirmation of swaps. The 

Commission has adopted regulation 

23.501, which requires, among other 

things, a timely and accurate 

confirmation of swap transactions 

(which includes execution, termination, 

assignment, novation, exchange, 

transfer, amendment, conveyance, or 

extinguishing of rights or obligations of 

a swap) among swap dealers and MSPs 

by the end of the first business day 

following the day of execution.659

Timely and accurate confirmation of 

swaps—together with portfolio 

reconciliation and compression—are 

important post-trade processing 

mechanisms for reducing risks and 

improving operational efficiency.660

8. Daily Trading Records 

Pursuant to section CEA 4s(g), the 

Commission adopted regulation 23.202, 

which requires swap dealers and MSPs 

to maintain daily trading records, 

including records of trade information 

related to pre-execution, execution, and 

post-execution data that is needed to 

conduct a comprehensive and accurate 

trade reconstruction for each swap. The 

final rule also requires that records be 

kept of cash or forward transactions 

used to hedge, mitigate the risk of, or 

offset any swap held by the swap dealer 

or MSP.661 Accurate and timely 

recordkeeping regarding all phases of a 

swap transaction can serve to greatly 

enhance a firm’s internal supervision, as 

well as the Commission’s ability to 

detect and address market or regulatory 

abuses or evasion. 

B. Category B: External Business 

Conduct Standards 

Pursuant to CEA section 4s(h), the 

Commission has adopted external 

business conduct rules, which establish 

business conduct standards governing 

the conduct of swap dealers and MSPs 

in dealing with their counterparties in 

entering into swaps.662 Broadly 

speaking, these rules are designed to 

enhance counterparty protection by 

significantly expanding the obligations 

of swap dealers and MSPs towards their 

counterparties. Under these rules, swap 

dealers and MSPs will be required, 

among other things, to conduct due 

diligence on their counterparties to 

verify eligibility to trade, provide 

disclosure of material information about 

the swap to their counterparties, 

provide a daily mid-market mark for 

uncleared swaps and, when 

recommending a swap to a 

counterparty, make a determination as 

to the suitability of the swap for the 

counterparty based on reasonable 

diligence concerning the counterparty. 

VII. Appendix C—Application of the 

Entity-Level Requirements to Swap 

Dealers and MSPs * 

U.S. Swap Dealer or MSP (including an affiliate of a non-U.S. person). 

Also applies when acting through a foreign branch.1

Apply. 

Non-U.S. Swap Dealer or MSP (including an affiliate of a U.S. person). First Category: 2 Substituted Compliance. 

Second Category: 3 Apply for U.S. counterparties; Substituted Compliance for SDR reporting with non-U.S. counterparties that are not 

guaranteed or conduit affiliates; Substituted compliance (except for 

Large Trader Reporting) with non-U.S. counterparties.4

* The Appendices to the Guidance should be read in conjunction with the rest of the Guidance. 

1Both Entity-Level and Transaction-Level Requirements are the ultimate responsibilities of the U.S.-based swap dealer or MSP. 

2First Category is capital adequacy, Chief Compliance Officer, risk management, and swap data recordkeeping (except Commission regulations 23.201(b)(3) and (4)). 3Second Category is SDR Reporting, certain aspects of swap data recordkeeping relating to complaints and marketing and sales materials 

(Commission regulations 23.201(b)(3) and (4)), and Large Trader Reporting. 4Substituted compliance does not apply to Large Trader Reporting, i.e., non-U.S. persons that are subject to part 20 would comply with it in 

the same way that U.S. persons comply. With respect to the SDR Reporting requirement, the Commission may make substituted compliance 

available only if direct access to swap data stored at a foreign trade repository is provided to the Commission. 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45369 

VIII. Appendix D—Application of the 

Category A Transaction-Level 

Requirements to Swap Dealers and 

MSPs * 

(Category A includes (1) Clearing and 

swap processing; (2) Margining and 

segregation for uncleared swaps; (3) 

Trade Execution; (4) Swap trading 

relationship documentation; (5) 

Portfolio reconciliation and 

compression; (6) Real-time public 

reporting; (7) Trade confirmation; and 

(8) Daily trading records).** 

U.S. Person (other 

than Foreign Branch 

of U.S. Bank that is a 

Swap Dealer or 

MSP) 

Foreign Branch of 

U.S. Bank that is a 

Swap Dealer or MSP 

Non-U.S. Person 

Guaranteed by, or 

Affiliate Conduit 1 of, 

a U.S. Person 

Non-U.S. Person Not 

Guaranteed by, and Not 

an Affiliate Conduit 1 of, 

a U.S. Person 

U.S. Swap Dealer or MSP (including an affiliate of a non-3U.S. person).Apply ........................ Apply ........................ Apply ........................ Apply. 

Foreign Branch of U.S. Bank that is a 

Swap Dealer or MSP.

Apply ........................ Substituted Compliance.Substituted Compliance.2Substituted Compliance.2

Non-U.S. Swap Dealer or MSP (including 

an affiliate of a U.S. person).

Apply ........................ Substituted Compliance.Substituted Compliance.Do Not Apply. 

* The Appendices to the Guidance should be read in conjunction with the rest of the Guidance. 

** Where one of the counterparties is electing the Inter-Affiliate Exemption, the Commission would expect the parties to the swap to comply with 

the conditions of the Inter-Affiliate Exemption, including the treatment of outward-facing swaps condition in Commission regulation 

50.52(b)(4)(i). 

1Factors that are relevant to the consideration of whether a non-U.S. person is an ‘‘affiliate conduit’’ include whether: (i) the non-U.S. person is 

majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the 

U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with 

such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial results 

of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be relevant. 2 Under a limited exception, where a swap between the foreign branch of a U.S. swap dealer or U.S. MSP and a non-U.S. person (that is not a 

guaranteed or conduit affiliate) takes place in a foreign jurisdiction other than Australia, Canada, the European Union, Hong Kong, Japan, or 

Switzerland, the counterparties generally may comply only with the transaction-level requirements in the foreign jurisdiction where the foreign 

branch is located if the aggregate notional value of all the swaps of the U.S. swap dealer’s foreign branches in such countries does not exceed 

5% of the aggregate notional value of all of the swaps of the U.S. swap dealer, and the U.S. person maintains records with supporting information for the 5% limit and to identify, define, and address any significant risk that may arise from the non-application of the Transaction-Level Requirements. 

NOTES: 1The swap trading relationship documentation requirement applies to all transactions with registered swap dealers and MSPs. 

2Participation in multilateral portfolio compression exercises is mandatory for dealer to dealer trades. 

IX. Appendix E—Application of the 

Category B Transaction-Level 

Requirements to Swap Dealers and 

MSPs * 

(Category B is External Business 

Conduct Standards). 

U.S. Person (other 

than Foreign Branch 

of U.S. Bank that is a 

Swap Dealer or 

MSP) 

Foreign Branch of 

U.S. Bank that is a 

Swap Dealer or MSP 

Non-U.S. Person 

Guaranteed by, or 

Affiliate Conduit 1 of, 

a U.S. Person 

Non-U.S. Person Not 

Guaranteed by, and Not an 

Affiliate Conduit 1 of, 

a U.S. Person 

U.S. Swap Dealer or MSP (including an ....

affiliate of a non-U.S. person) .....................

Apply ........................ Apply ........................ Apply ........................ Apply. 

U.S. Swap Dealer or MSP (when it solicits 

and negotiates through a foreign subsidiary or affiliate).

Apply ........................ Do Not Apply ............ Do Not Apply ............ Do Not Apply. 

Foreign Branch of U.S. Bank that is a 

Swap Dealer or MSP.

Apply ........................ Do Not Apply ............ Do Not Apply ............ Do Not Apply. 

Non-U.S. Swap Dealer or MSP (including 

an affiliate of a U.S. person).

Apply ........................ Do Not Apply ............ Do Not Apply ............ Do Not Apply. 

*The Appendices to the Guidance should be read in conjunction with the rest of the Guidance. 

1Factors that are relevant to the consideration of whether a non-U.S. person is an ‘‘affiliate conduit’’ include whether: (i) the non-U.S. person is 

majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the 

U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with 

such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial results 

of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be 

relevant. 

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45370 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

X. Appendix F—Application of Certain 

Entity-Level and Transaction-Level 

Requirements to Non-Swap Dealer/NonMSP Market Participants* 

(The relevant Dodd-Frank requirements 

are those relating to: clearing, trade 

execution, real-time public reporting, 

Large Trader Reporting, SDR Reporting 

and swap data recordkeeping).** 

U.S. Person (including an 

affiliate of 

non-U.S. person) 

Non-U.S. Person 

Guaranteed by, or 

Affiliate Conduit 1 of, 

a U.S. Person 

Non-U.S. Person Not 

Guaranteed by, or Affiliate 

Conduit 1 of, 

by U.S. Person 

U.S. Person (including an affiliate of non-U.S. person) .. Apply .................................. Apply .................................. Apply. 

Non-U.S. Person Guaranteed by, or Affiliate Conduit 1

of, a U.S. person.

Apply .................................. Substituted Compliance.2 Do Not Apply. 

Non-U.S. Person Not Guaranteed by, or Affiliate Conduit 1 of, U.S. Person.Apply .................................. Do Not Apply ..................... Do Not Apply. 

* The Appendices to the Guidance should be read in conjunction with the rest of the Guidance. 

** Where one of the counterparties is electing the Inter-Affiliate Exemption, the Commission would generally expect the parties to the swap to 

comply with the conditions of the Inter-Affiliate Exemption, including the treatment of outward-facing swaps condition in Commission regulation 50.52(b)(4)(i). 

1Factors that are relevant to the consideration of whether a non-U.S. person is an ‘‘affiliate conduit’’ include whether: (i) the non-U.S. person is 

majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the 

U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with 

such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial results 

of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be relevant. 2Substituted compliance does not apply to Large Trader Reporting, i.e., non-U.S. persons that are subject to part 20 would comply with it in 

the same way that U.S. persons comply. With respect to the SDR Reporting requirement, the Commission may permit substituted compliance 

only if direct access to swap data stored at a foreign trade repository is provided to the Commission. 

Issued in Washington, DC, on July 17, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Appendices to Interpretive Guidance and 

Policy Statement Regarding Compliance with 

Certain Swap Regulations—Commission 

Voting Summary and Statements of 

Commissioners 

Note: The following appendices do not 

constitute a part of the Interpretive Guidance 

and Policy Statement itself. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton and Wetjen voted in 

the affirmative; Commissioner O’Malia voted 

in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the Interpretive Guidance and 

Policy Statement Regarding Compliance with 

Certain Swap Regulations (Guidance) and the 

related phase-in exemptive order also being 

adopted today. With this Commission action 

another important step has been taken to 

make swaps market reform a reality. 

This Guidance is being adopted just shy of 

the third anniversary of President Obama 

signing the Dodd-Frank Act, and that law 

was historic. It was an historic answer to an 

historic problem: the near collapse of the 

American economy driven, in part, by the 

unregulated derivatives marketplace. 

Congress and the President were clear in 

their intention to bring transparency to this 

marketplace, to lower risk to the public, and 

to ensure the regulation of swap dealers and 

major swap participants. 

In 2008, when both the financial system 

and the financial regulatory system failed the 

public, Americans paid the price through the 

crisis with their jobs, their pensions, and 

their homes. We lost 8 million jobs in that 

crisis and thousands of businesses shuttered. 

The swaps market was central to the crisis 

and financial institutions operating 

complicated swaps businesses and offshore 

entities nearly toppled the economy. 

Congress responded. Americans are 

remarkably resilient—but the public really 

does expect us to learn from the lessons of 

the crisis, and to do everything possible to 

prevent this from happening to any of us 

again. 

It’s pretty straightforward, I think. Even 

though we oversee, here at the CFTC, a 

complex and sometimes difficult to 

understand market (my mom consistently 

asks me, ‘‘Gary, what are swaps?’’), the 

questions the American people are looking 

for us to answer are simple: Have we lowered 

risk? Have we brought transparency to these 

markets? Have we promoted competition and 

openness in these markets so that end users 

can get the greatest benefit when they seek 

to lower their risk and focus on what they do 

well—which is employing people, innovating 

and moving our economy forward? That is 

why reform matters. 

Five years after the crisis and three years 

after Dodd-Frank passed, market participants 

are coming into compliance with the 

common sense reforms that Congress and the 

President laid out. Through Dodd-Frank and 

the rules that this agency has put in place, 

no longer will the markets be opaque and 

dark, and we will have transparency in the 

markets. In fact, throughout this year, for the 

first time, the public and regulators have 

benefitted from reporting to swap data 

repositories and reporting to the public. And 

later this year, starting actually in August, 

facilities called swap execution facilities will 

start so that the public can benefit from 

greater openness and competition before the 

transaction occurs. And by the end of this 

year, there are likely to be trade execution 

mandates for interest rate and credit 

derivative index products, as well. 

Central clearing became required for the 

broader market earlier this year, with key 

phase in dates to come this Fall and Winter, 

as well. We have 80 swap dealers, and, yes, 

two major swap participants, now 

provisionally registered. As part of the 

responsibilities accompanying registration, 

they’re responsible for sales practice, record 

keeping and other business conduct 

requirements that help lower the risk to the 

public. 

Yesterday, we took another significant step 

when we and the European Commission 

announced a path forward regarding joint 

understandings regarding the regulation of 

cross border derivatives. I want to publicly 

thank Commissioner Michel Barnier, his 

Director General Jonathan Faull, and their 

staffs, the staffs at the European Securities 

Market Authority, and Steven Maijoor’s 

leadership, for collaborating throughout the 

reform process. This was a significant step 

forward in harmonizing and giving clarity to 

the markets as to when there might be 

jurisdictional overlaps with regard to this 

reform. 

Today, we are considering two important 

actions, the Guidance, as well as a related 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45371 

1Cross-Border Application of Certain Swaps 

Provisions of the Commodity Exchange Act, 77 FR 

41214 (July 12, 2012). 

2 7 U.S.C. 1 et seq. 

phase-in exemptive order. And as you 

probably have heard me say before, the 

nature of modern finance is that financial 

institutions commonly set up hundreds, even 

thousands of legal entities around the globe. 

In fact, the U.S.’s largest banks each have 

somewhere between 2,000 and 3,000 legal 

entities around the globe. Some of them have 

hundreds of legal entities just in the Cayman 

Islands alone. We have to remind ourselves 

that the largest banks and institutions are 

global in nature, and when a run starts on 

any part of an overseas affiliate or branch of 

a modern financial institution, risk comes 

crashing right back to our shores. 

Similarly, if it’s an EU financial institution 

and it has some guaranteed affiliate in the 

U.S. or overseas that gets into trouble, that 

risk can flow back to their shores. That’s 

why, together both we and Europe recognize 

the importance of covering guaranteed 

affiliates, whether they’re guaranteed 

affiliates of a U.S. person or of an EU person. 

There’s no question to me, at least, that the 

words of Dodd-Frank addressed this (i.e., risk 

importation) when they said that a direct and 

significant connection with activities and/or 

effect on commerce in the United States 

covers these risks that may come back to us. 

I want to publicly thank Chairman Barney 

Frank along with Spencer Bachus, Frank 

Lucas, and Collin Peterson, and their staffs 

for reaching out to the CFTC and the public 

to ask how to best address offshore risks that 

could wash back to our economy in DoddFrank. 

In addition, we should not forget the actual 

events over the past several years that remind 

us of the risks to the U.S. that can be posed 

by offshore entities: 

AIG nearly brought down the U.S. 

economy. Lehman Brothers had 3,300 legal 

entities, including a London affiliate that was 

guaranteed here in the U.S., and it had 

130,000 outstanding swap transactions. 

Citigroup had structured investment vehicles 

that were set up in the Cayman Islands, run 

out of London, and yet were central to not 

one, but two bailouts of that institution. Bear 

Stearns, in 2007 had two sinking hedge funds 

that had to be bailed out by Bear Stearns— 

and, yes, those hedge funds were organized 

in the jurisdiction of the Cayman Islands. 

More than a decade earlier, I was working 

in my position as Assistant Secretary of the 

United States Department of the Treasury. I 

found myself making a call from Connecticut 

to then Treasury Secretary Robert Rubin to 

report that Long Term Capital Management’s 

$1.2 trillion swaps book was not only going 

to go down within a day or two, but that the 

business—that we thought was in 

Connecticut—was actually incorporated in 

the Cayman Islands as a PO Box facility. 

Even last year, we had yet another 

reminder that branches of big U.S. banks can 

bring risk back to the US. Even though they 

were not the risks as large as I’ve just related, 

JPMorgan Chase’s Chief Investment Office’s 

credit default swaps were executed primarily 

in the U.K. branch. 

Each of these examples demonstrated a 

direct and significant connection with 

activities and/or an effect on commerce in 

the United States. Congress knew this painful 

history when it provided the cross border 

provisions of swaps market reform. And as 

market participants asked the CFTC to 

provide interpretive guidance on Congress’s 

word, I believe that we have had to keep this 

painful history in mind. Two and a half years 

ago, the CFTC started working on guidance, 

which was published for notice and 

comment in June 2012, and for which we 

sought further input on in December 2012. 

We have greatly benefitted from this public 

input. The Guidance the Commission will 

adopt today incorporates the public’s input 

and, I think, appropriately interprets the 

cross border provisions of Dodd-Frank. 

There are four areas that I think really are 

important: 

First, the CFTC interprets the cross-border 

provisions to cover swaps between non U.S. 

swap dealers and guaranteed affiliates of U.S. 

Persons, as well as swaps between two 

guaranteed affiliates that are not swap 

dealers. The guidance does, as was proposed, 

recognize and embrace the concept of 

substituted compliance where there are 

comparable and comprehensive rules abroad. 

But the history of AIG, Lehman Brothers, 

Citigroup and the others, and of guaranteed 

affiliates, is a strong lesson that Congress 

knew when we were approaching these 

issues. 

Second, the definition of U.S. person in 

this guidance captures offshore hedge funds 

and collective investment vehicles that have 

their principal place of business here in the 

U.S., or that are majority owned by U.S. 

persons. Addressing ourselves to guidance, 

and yet forgetting the lessons of Long Term 

Capital Management or Bear Stearns, is not 

in my opinion what Congress wanted. 

Third, under the guidance, foreign 

branches, like the JPMorgan’s U.K. branch, of 

U.S. swap dealers may also comply with 

Dodd-Frank through substituted compliance 

if they are appropriately ring-fenced—that is, 

they are truly branches where employees and 

the booking and the taxes are actually 

offshore in the foreign branch. The Guidance 

allows, if there are comparable and 

comprehensive regimes overseas and 

supervisory authorities overseas looking at 

those branches, that those branches can avail 

themselves to substituted compliance in the 

manner offshore guaranteed affiliates would. 

Lastly, the guidance provides that swap 

dealers, foreign or U.S., transacting with U.S. 

persons (whether they be in New Jersey, 

Maryland, Michigan, Arkansas, Iowa—I have 

to get all the right states, recognizing where 

my fellow Commissioners come from) 

anywhere in the United States, must comply 

with Dodd-Frank’s swap market reform. The 

guidance does provide, though, that U.S. 

Persons can meet international people 

anonymously, and not only on our exchanges 

called designated contract markets, but also 

on the new swap execution facilities, as well 

as foreign boards of trade. International 

parties trading on those platforms do not 

have to worry about whether those swaps 

might make them a swap dealer, or whether 

they need to worry about certain transaction 

level requirements. And I think that was 

important to maintain and promote the 

liquidity of these three very important types 

of platforms—foreign boards of trade, swap 

execution facilities, and designated contract 

markets. 

In conclusion, I will be voting in support 

of the Guidance and the related phase-in 

exemptive order also being adopted today. 

I’ll say more about the exemptive order in my 

statement of support for that document, but 

I think these are both critical steps for the 

Commission and swaps reform. They add to 

the approximately 56 final guidance and 

rules that this Commission has adopted. 

We’re well over 90 percent through the 

various rule and guidance writing. And the 

markets are probably well towards half way 

implementing these reforms. I have a deep 

respect for how much work market 

participants are doing to come into 

compliance. 

So now, 3 years after the passage of 

financial reform, and a full year after the 

Commission proposed guidance with regard 

to the cross border application of reform, it 

is time for reforms to properly apply to and 

cover those activities that, as identified by 

Congress in section 722(d) of the Dodd-Frank 

Act, have ‘‘a direct and significant 

connection with activities in, or effect on, 

commerce of the United States.’’ With the 

additional transitional phase-in period 

provided by this Order, it is now time for the 

public to get the full benefit of the 

transparency and the measures to reduce risk 

included in Dodd Frank reforms. 

Appendix 3—Dissenting Statement of 

Commissioner Scott D. O’Malia 

I respectfully dissent from the Commodity 

Futures Trading Commission’s (the 

‘‘Commission’’ or ‘‘CFTC’’) approval of its 

interpretive guidance and policy statement 

(‘‘Guidance’’) regarding the cross-border 

application of the swaps provisions of the 

Commodity Exchange Act (‘‘CEA’’), as well 

as from the Commission’s approval of a 

related exemptive order (‘‘Exemptive 

Order’’). 

When I voted in July 2012 to issue for 

public comment the proposed interpretive 

guidance and policy statement (‘‘Proposed 

Guidance’’),1 I made clear that if I had been 

asked to vote on the Proposed Guidance as 

final, my vote would have been no. I then 

laid out my concerns with the Proposed 

Guidance, all relating to the Commission’s 

unsound interpretation of section 2(i) of the 

CEA,2 which governs the extraterritorial 

application of the CEA’s swaps provisions. 

Regrettably, the Guidance fails to address 

these concerns and constitutes a regulatory 

overreach based on a weak foundation of thin 

statutory and legal authority. 

Like the Proposed Guidance, the Guidance: 

(1) Fails to articulate a valid statutory 

foundation for its overbroad scope and 

inconsistently applies the statute to different 

activities; (2) crosses the line between 

interpretive guidance and rulemaking; and 

(3) gives insufficient consideration to 

international law and comity. These 

shortcomings are compounded by serious 

procedural flaws in the Commission’s 

treatment of international harmonization and 

substituted compliance, as well as in its 

issuance of the Exemptive Order. 

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45372 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

3 § 2(i). 

4 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, 124 Stat. 1376 

(2010). 

5 § 2(i)(1). 

6Stated another way, section 2(i)(1) may be read 

as the following: ‘‘[The CEA’s swaps provisions 

enacted by the Dodd-Frank Act] may apply to 

activities outside the United States only if those 

activities have a direct and significant connection 

with activities in, or effect on, commerce of the 

United States.’’ 

7For a recent statutory analysis of the 

extraterritorial application of the Securities and 

Exchange Act of 1934, see Morrison v. Nat’l 

Australia Bank, 561 U.S. ll (2010). 

8See Appalachian Power Co. v. Envtl. Prot. 

Agency, 208 F.3d 1015, 1027 (D.C. Cir. 2000) 

(vacating agency guidance interpreting statutory 

language with practical binding effect because it did 

not define subparts of the interpreted term and 

should have been promulgated as a legislative rule 

under the APA). 

9 7 U.S.C. 2(i)(2) ([The CEA’s swaps provisions 

enacted by the Dodd-Frank Act] ‘‘shall not apply to 

activities outside the United States unless those 

activities . . . contravene such rules or regulations 

as the Commission may prescribe or promulgate as 

are necessary or appropriate to prevent the evasion 

of any provision of [the CEA enacted by the DoddFrank Act]’’). 

10 17 CFR 1.6. 

11 5 U.S.C. 551 et seq. 

12See Gen. Elec. Co. v. Envtl. Prot. Agency, 290 

F.3d 377, 380 (D.C. Cir. 2002) (finding that a 

guidance document is final agency action); 

Appalachian Power, 208 F.3d at 1020–21. 

13See Chrysler Corp. v. Brown, 441 U.S. 281, 

302–03 (1979) (agency rulemaking with the force 

and effect of law must be promulgated pursuant to 

the procedural requirements of the APA). 

14 ‘‘A document will have practical binding effect 

before it is actually applied if the affected private 

parties are reasonably led to believe that failure to 

conform will bring adverse consequences . . . .’’ 

Gen. Elec., 290 F.3d at 383 (quoting Anthony, 

Robert A., Interpretive Rules, Policy Statements, 

Guidances, Manuals, and the Like—Should Federal 

Agencies Use Them to Bind the Public?, 41 Duke 

L.J. 1311 (1992)) (vacating an agency’s guidance 

document that the court found to have practical 

binding effect and where procedures under the APA 

were not followed). 

15A no-action letter is issued by a division of the 

Commission and states that, for the reasons and 

under the conditions described therein, it will not 

recommend that the Commission commence an 

enforcement action against an entity or group of 

entities for failure to comply with obligations 

imposed by the Commission. 

Lack of Statutory Foundation 

Section 2(i) of the CEA 3 as amended by the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 (the ‘‘DoddFrank Act’’) 4 provides, in part, that the 

Commission’s swap authority ‘‘shall not 

apply’’ to activities outside the United States 

unless those activities ‘‘have a direct and 

significant connection with activities in, or 

effect on, commerce of the United States 

. . . .’’ 5 This provision is clearly a limitation 

on the Commission’s authority.6 It follows 

that the Commission must properly articulate 

how and when the ‘‘direct and significant’’ 

standard is met in order to apply 

Commission rules to swap activities that take 

place outside of the United States. 

The Guidance, however, fails to do so. 

Instead, it treats section 2(i) as a ready tool 

to expand authority rather than as a 

limitation. The statutory analysis section of 

the Guidance is insufficient to support the 

broad sweep of extraterritorial activities that 

the Guidance contemplates would fall under 

the Commission’s jurisdiction, relying 

heavily on a comparison to somewhat similar 

statutory language whose wholly different 

context renders the comparison 

unpersuasive. The Guidance makes no 

mention of statutes that may be more 

analogous to the CEA, such as the securities 

or banking laws.7 Because the ‘‘direct and 

significant’’ standard is never defined, the 

Guidance’s attempts to link certain 

requirements imposed on market participants 

to the ‘‘direct and significant’’ standard do 

not establish the requisite jurisdictional 

nexus.8

I would also like to point out that CEA 

section 2(i) contains a second clause, which 

allows for the limited application of the 

Commission’s swap rules to activities outside 

the United States when they violate the 

Commission’s anti-evasion rules.9 Pursuant 

to this clause, the Commission promulgated 

section 1.6 under Part 1 of its regulations.10

Rather than relying on section 1.6 to address 

its concerns about evasion, the Commission 

chose simply to reference the same concerns 

in justifying its overbroad reach in the 

Guidance. 

With such an unsound foundation for the 

Commission’s extraterritorial authority under 

the ‘‘direct and significant’’ standard, I am 

not surprised that the Guidance often applies 

section 2(i) of the CEA inconsistently and 

arbitrarily. Examples of inconsistency 

abound. 

For instance, just as with the Proposed 

Guidance, the Guidance does not provide a 

basis for its reasoning that all TransactionLevel Requirements described in the 

Guidance satisfy the ‘‘direct and significant’’ 

standard under section 2(i). As I stated in my 

concurrence to the Proposed Guidance, trade 

execution and real-time public reporting 

requirements, although important for 

transparency purposes, do not raise the same 

systemic risk concerns that clearing and 

margining for uncleared swaps do. The 

Guidance acknowledges this point, but does 

not go on to sufficiently explain why they 

should be, and are, treated equally. The 

Guidance also acknowledges that clearing 

and margining, because of their implications 

for systemic risk, could be classified as 

Entity-Level Requirements, but it does not 

explain why are they are not. The Guidance’s 

failure to give meaning to the ‘‘direct and 

significant’’ standard in its discussion of 

these requirements is glaring. 

Inconsistent application can also be seen 

within a specific Transaction-Level 

Requirement, for example reporting to swap 

data repositories (‘‘SDRs’’). The Guidance 

allows non-U.S. swap dealers (‘‘SDs’’) and 

major swap participants (‘‘MSPs’’) to utilize 

substituted compliance for SDR reporting of 

their swaps with non-U.S. counterparties, but 

it does not allow for substituted compliance 

for non-U.S. SD and MSPs’ trades with U.S. 

counterparties. Again, the Commission fails 

here to give real meaning to ‘‘direct and 

significant’’ in order to adequately explain its 

reasoning for this distinction. The rationale 

is even weaker given the fact that substituted 

compliance is available for swaps with nonU.S. counterparties only under the condition 

that the Commission has direct access to the 

relevant data at the foreign trade repository. 

In either case, the Commission will have 

direct access to the relevant data, whether 

substituted compliance is available or not. 

This raises the question: if the outcome is the 

same, why is the distinction made? If it is 

different, the Guidance does not explain how 

or why—despite requiring data at foreign 

trade repositories to be essentially the same 

as data at domestic SDRs, before the 

Commission even contemplates substituted 

compliance for SDR reporting. 

Yet another example of inconsistent 

application of section 2(i) involves the 

requirement of physical commodity large 

swaps trader reporting (‘‘Large Trader 

Reporting’’). In contrast to SDR reporting, the 

Guidance does not allow substituted 

compliance for Large Trader Reporting, even 

for swaps between a non-U.S. registrant and 

a non-U.S. counterparty. The Commission’s 

flimsy rationale is that Large Trader 

Reporting involves data conversion to 

‘‘futures equivalent’’ units, and that it would 

cost too much time and resources for the 

Commission to conduct this conversion on 

data that it could access in a foreign trade 

repository. Here again, the ‘‘direct and 

significant’’ standard is nowhere to be found. 

Moreover, the Commission overstates the 

burden of the ‘‘futures equivalent’’ 

conversion and, more generally, the 

significance of Large Trader Reporting in its 

oversight duties, while understating the 

availability of data collected through SDR 

reporting, with its eligibility for substituted 

compliance, to achieve the same regulatory 

objectives. 

Interpretive Guidance Versus Rulemaking 

The imposition of requirements on market 

participants raises another of my major 

concerns with the Guidance. I strongly 

disagree with the Commission’s decision to 

issue its position on the cross-border 

application of its swaps regulations in the 

form of ‘‘interpretive guidance’’ instead of 

promulgating a legislative rule under the 

Administrative Procedure Act (‘‘APA’’).11

Simply putting the guise of ‘‘guidance’’ on 

this document does not change its content or 

consequences. Where agency action has the 

practical effect of binding parties within its 

scope, it has the force and effect of law, 

regardless of the name it is given.12 Legally 

binding regulations that impose new 

obligations on affected parties—‘‘legislative 

rules’’—must conform to the APA.13 On its 

face, the Guidance sets out standards that it 

contemplates will be regularly applied by 

staff to cross-border activities in the swaps 

markets. Market participants cannot afford to 

ignore detailed regulations imposed upon 

their activities that may result in enforcement 

or other penalizing action.14 This point is 

underlined by the fact that, as I discuss 

below, Commission staff no-action letters 

have been issued in connection with 

compliance obligations that have essentially 

been imposed by the Guidance.15 All of this 

leads to the logical conclusion that the 

Guidance has a practical binding effect and 

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Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 45373 

16The ‘‘arbitrary and capricious’’ standard of 

review of agency action under the APA is a 

rationality analysis also known as the hard-look 

doctrine: 

Under the leading formulation of this doctrine, 

‘‘the agency must examine the relevant data and 

articulate a satisfactory explanation for its action 

including a ‘rational connection between the facts 

found and the choices made.’ ’’ The court 

‘‘consider[s] whether the decision was based on a 

consideration of the relevant factors and whether 

there has been a clear error of judgment.’’ In 

addition, the agency may not ‘‘entirely fail[ ] to 

consider an important aspect of the problem,’’ may 

not ‘‘offer[ ] an explanation for its decision that runs 

counter to the evidence before the agency,’’ nor 

offer an explanation that is ‘‘so implausible that it 

could not be ascribed to a difference in view or the 

product of agency expertise.’’ The agency must also 

relate the factual findings and expected effects of 

the regulation to the purposes or goals the agency 

must consider under the statute as well as respond 

to salient criticisms of the agency’s reasoning. 

Stack, Kevin M., Interpreting Regulations, 111 

Mich. L. Rev. 355, 378–79 (2012) (internal citations 

omitted). 

17 7 U.S.C. 19(a). 

18The Commission received comment letters 

from, among others: Jonathan Faull, European 

Commission; Steven Maijoor, European Securities 

and Markets Authority; David Lawton and Stephen 

Bland, UK Financial Services Authority; Pierre 

Moscovici, France Ministry of Economy and 

Finance, Christian Noyer, Autorite de controle 

prudential, and Jacques Delmas-Marsalet, Autorite 

des marches financiers; Patrick Raaflaub and Mark 

Branson, Swiss Financial Market Supervisory 

Authority; Masamichi Kono, Japan Financial 

Services Agency, and Hideo Hayakawa, Bank of 

Japan; K.C. Chan, Financial Services and Treasury 

Bureau of the Hong Kong Special Administrative 

Region; Belinda Gibson, Australian Securities and 

Investments Commission, Malcolm Edey, Reserve 

Bank of Australia, Arthur Yuen, Hong Kong 

Monetary Authority, Keith Lui, Hong Kong 

Securities and Futures Commission, and Teo Swee 

Lian, Monetary Authority of Singapore. These and 

all public comment letters on the Proposed 

Guidance are available at: http://comments.cftc.gov/ 

PublicComments/CommentList.aspx?id=1234&ctl00

_ctl00_cphContentMain_MainContent_gv

CommentList. 

19Final Exemptive Order Regarding Compliance 

With Certain Swap Regulations, 78 FR 858 (January 

7, 2013). The document was adopted by the 

Commission in December 2012 and published in 

the Federal Register in January 2013. 

20No-Action Relief for Registered Swap Dealers 

and Major Swap Participants from Certain 

Requirements under Subpart I of Part 23 of 

Commission Regulations in Connection with 

Uncleared Swaps Subject to Risk Mitigation 

Techniques under EMIR, CFTC Letter No. 13–45 

(July 11, 2013). 

21 I have set forth in note 18 some of the comment 

letters that the Commission has received from 

foreign supervisors and regulators. By allowing 

substituted compliance to be addressed through a 

no-action letter, is the Commission implying that, 

e.g., the Bank of Japan should accede to, e.g., 

decisions of the CFTC Division of Swap Dealer and 

Intermediary Oversight? If so, I find such 

implication inappropriate. 

should have been promulgated as a 

legislative rule under the APA. 

There are important policy and legal 

considerations that weigh strongly in support 

of rulemaking in accordance with the APA. 

Not only do the safeguards enacted by 

Congress in the APA ensure fair notice and 

public participation, they help to ensure 

reasoned decision-making and 

accountability. In addition, the APA requires 

that courts take a ‘‘hard look’’ at agency 

action.16

By issuing ‘‘interpretive guidance’’ instead 

of rulemaking, the Commission has also 

avoided analyzing the costs and benefits of 

its actions pursuant to section 15(a) of the 

CEA,17 because the CEA requires the 

Commission to consider costs and benefits 

only in connection with its promulgation of 

regulations and orders. Compliance with the 

Commission’s swaps regulations entails 

significant costs for market participants. 

Avoiding cost-benefit analysis by labeling the 

document as guidance is unacceptable. 

In my concurrence to the Proposed 

Guidance, I suggested that the Commission 

should at least prepare a report analyzing the 

costs attributable to the breadth of the 

Commission’s new authority under CEA 

section 2(i). I am disappointed, but not 

surprised, that the Commission has not taken 

up my suggestion. 

Insufficient Consideration of Principles of 

International Comity 

Also in my concurrence to the Proposed 

Guidance, I pointed out that the 

Commission’s approach gave insufficient 

consideration to principles of international 

comity. The Guidance suffers from the same 

shortcoming. 

The Commission does describe principles 

of international comity in the Guidance, as it 

did in the Proposed Guidance. However, 

mere citation is meaningless if 

unaccompanied by adherence. With an 

interpretation of section 2(i) that essentially 

views the Commission’s jurisdiction as 

boundless, roping in all transactions with 

U.S. persons regardless of the location or the 

regulations that foreign regulators may have 

in place, the reality is that the Commission’s 

approach is unilateral and does not give 

adequate consideration to comity principles. 

These principles are crucial given the 

global, interconnected nature of today’s 

swaps markets. Properly considering these 

principles—in addition to indicating respect 

for the international system and the 

legitimate interests of other jurisdictions— 

strengthens, not weakens, the Commission’s 

ability to effectively regulate swaps markets. 

On the Path Forward to Harmonization, But 

a Flawed Process 

In order to implement principles of 

international comity and develop a 

harmonized global regulatory system that is 

both effective and efficient, I have 

consistently called for meaningful 

cooperation with foreign regulators. I initially 

did so in my concurrence to the Proposed 

Guidance, and the necessity of greater 

collaboration was subsequently driven home 

by the number and tone of comment letters 

on the Proposed Guidance submitted by 

foreign regulators.18 Then, when the 

Commission finalized a cross-border 

exemptive order last December with an 

expiration date of July 12,19 in my concurring 

statement I again urged the Commission and 

foreign regulators to engage in meaningful, 

substantive discussions. 

I am pleased that over the past several 

months, this engagement has taken place and 

progress has been made toward 

harmonization. However, we are not where 

we need to be: many outstanding issues and 

questions remain, from data privacy 

concerns, to the implications of other 

jurisdictions still finalizing their regulations, 

to a lack of a clear, consistent and transparent 

framework for substituted compliance. It 

would have made sense for these issues to be 

addressed in the Guidance—but they are not. 

The looming July 12 expiration of the 

December exemptive order and the resulting 

time crunch cannot reasonably be cited as the 

reason for this failure, because July 12 is an 

artificial date; it could have been pushed 

back in order to reach the right outcome with 

the right process. 

Instead, while we are moving toward a 

workable outcome on harmonization, the 

process by which we are getting there is 

patently unacceptable. The most glaring 

example of this flawed process is this week’s 

publication of a Commission staff no-action 

letter allowing substituted compliance for 

certain of the Transaction-Level 

Requirements.20 It boggles the mind to think 

that a staff letter issued by a single division, 

with no input from the Commission, would 

be used as the vehicle for addressing such a 

major issue.21 Making matters worse, this noaction letter is outside the scope of a 

forthcoming Commission decision regarding 

the comparability of European rules. And the 

relief is not time-limited, thereby creating an 

effect similar to a rulemaking. Consequently, 

this indefinite exclusion not only 

preemptively overrides a Commission 

decision, but it also seems to provide relief 

beyond that contemplated by the Guidance, 

which calls for a re-evaluation of all 

substituted compliance determinations 

within four years of the initial determination. 

Unfortunately, this is not the first instance 

in recent times of staff no-action letters being 

used to issue Commission policy. Not only 

are they an improper tool to get around 

formal Commission action, their prolific use 

is a reflection of the ad-hoc, last-minute 

approach that has been far too prevalent 

lately at the Commission. I cannot emphasize 

this enough: the Commission must stop this 

approach and get back to issuing policy in a 

more formal, open and transparent manner. 

Substituted Compliance 

In my discussions with fellow regulators 

abroad and international regulatory bodies, it 

is clear that there are varying degrees of 

reforms being developed and implemented in 

respective jurisdictions: some are comparable 

to U.S. regulations and some are less 

stringent, but there are some that exceed the 

Commission’s own requirements. I would 

have preferred the Commission to take the 

past year following the release of the 

Proposed Guidance to engage our 

international colleagues and to involve the 

International Organization of Securities 

Commissions (‘‘IOSCO’’) in order to resolve 

the issue of harmonizing our rules. Under 

this approach, we could finalize our 

guidance upon completion of the 

international harmonization process, 

allowing us to take into account any 

shortcomings in that process. Instead, we 

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45374 Federal Register / Vol. 78, No. 144 / Friday, July 26, 2013 / Rules and Regulations 

22Section 4(c) of the CEA grants the Commission 

the authority to ‘‘exempt any agreement, contract, 

or transaction (or class thereof) that is otherwise 

subject to subsection (a) (including any person or 

class of persons offering, entering into, rendering 

advice or rendering other services with respect to, 

the agreement, contract, or transaction). . . .’’ 7 

U.S.C. 6(c). Section 4(a) applies to ‘‘any person to 

offer to enter into, to enter into, to execute, to 

confirm the execution of, or to conduct any office 

or business anywhere in the United States, its 

territories or possessions, for the purpose of 

soliciting, or accepting any order for, or otherwise 

dealing in, any transaction in, or in connection 

with, a contract for the purchase or sale of a 

commodity for future delivery (other than a contract 

which is made on or subject to the rules of a board 

of trade, exchange, or market located outside the 

United States, its territories or possessions). . . .’’ 

7 U.S.C. 6(a). 

23The Exemptive Order claims, unconvincingly, 

that it falls under a good-cause exception to noticeand-comment requirements provided for by the 

APA under section 553(b)(B): ‘‘Except when notice 

and hearing is required by statute, this subsection 

does not apply . . . (B) when the agency for good 

cause finds (and incorporates the finding and a brief 

statement of reasons therefore in the rules issued) 

that notice and public procedure thereon are 

impracticable, unnecessary, or contrary to the 

public interest.’’ 5 U.S.C. 553(b)(B) (emphasis 

added). However, section 4(c) of the CEA clearly 

provides that the Commission may grant exemptive 

relief only by ‘‘rule, regulation, or order after notice 

and opportunity for hearing’’ (emphasis added). 7 

U.S.C. 6(c). The APA further provides under section 

559 that it does not ‘‘limit or repeal additional 

requirements imposed by statute or otherwise 

recognized by law.’’ 5 U.S.C. 559. The CEA also 

grants emergency powers to the Commission under 

exigent circumstances. See, e.g., 7 U.S.C. 12a(9). In 

addition, courts have narrowly construed the goodcause exception and placed the burden of proof on 

the agency. See Tenn. Gas Pipeline Co. v. Fed. 

Energy Regulatory Comm’n, 969 F.2d 1141 (D.C. 

Cir. 1992); Guardian Fed. Sav. & Loan Ass’n v. Fed. 

Sav. & Loan Ins. Corp., 589 F.2d 658, 663 (D.C. Cir. 

1978). 

24See, e.g., 7 U.S.C. 6s(d)(2) (‘‘The Commission 

may not prescribe rules imposing prudential 

requirements on swap dealers or major swap 

participants for which there is a prudential 

regulator.’’); 7 U.S.C. 6b–1(b) (‘‘The prudential 

regulators shall have exclusive authority to enforce 

the provisions of section 4s(e) with respect to swap 

dealers or major swap participants for which they 

are the prudential regulator.’’) 

25 In a recent op-ed article James Giddens, the 

bankruptcy trustee for MF Global’s U.S.-registered 

entities, points out that serious concerns regarding 

the harmonization, or lack thereof, of bankruptcy 

regimes were identified during the resolution of 

Lehman Brothers in 2008 (he was then the 

liquidation trustee for Lehman Brothers’s U.S. 

broker-dealer), only for similar failings to appear 

with MF Global. He urges clearer and more 

consistent cross-border rules regarding the 

protection of customer money in advance of any 

future multinational financial company meltdown. 

Giddens, James, How to Avoid the Next MF Global 

Surprise: Change Cross-Border Rules to Stop Raids 

on U.S. Customer Accounts, Wall St. J., July 9, 2013. 

have chosen the reverse order: to impose 

statutorily weak guidance, with all its noaction riders and exemptions, with only the 

promise of further negotiations with our 

foreign counterparts. 

Given the way the Commission has 

proceeded up to this point, it is my hope that 

the harmonization work lying ahead will be 

undertaken in a more transparent manner 

and not done through the abused no-action 

process that lacks any formal Commission 

process or oversight. Further, I hope that the 

process of substituted compliance will offer 

the opportunity for other regulatory bodies to 

engage directly with the full Commission, so 

that we can better understand how our rules 

and theirs will work and can minimize the 

likelihood of regulatory retaliation and 

inconsistent, duplicative, or conflicting rules. 

I believe the Commission has worked too 

hard to develop principles and standards that 

will encourage greater transparency, open 

access to clearing and trading and improved 

market data to let them go to waste due to 

a lack of global regulatory harmonization. 

I want to work with other home country 

regulators to ensure there is not an 

opportunity for entities to exploit regulatory 

loopholes. The stark reality is that this 

Commission is not the global regulatory 

authority and does not have the resources to 

support such a mission. Therefore, our best 

and most effective solution is to engage in a 

fully transparent discussion on substituted 

compliance and to do so immediately. 

Exemptive Order 

In an effort to mitigate the broad reach of 

the Guidance and accommodate its lastminute finalization, and in a moment of 

humility, the Commission has agreed to 

delay the application of certain elements of 

the Commission’s swaps regulations with its 

approval of the Exemptive Order. The 

Exemptive Order provides relief ranging from 

75 days (for application of the expanded U.S. 

person definition, for example) to December 

21, 2013 (for Entity-Level and TransactionLevel Requirements for non-U.S. SDs and 

MSPs in certain jurisdictions). The 

Commission is issuing the Exemptive Order 

pursuant to section 4(c) of the CEA.22

Even though the Exemptive Order goes into 

effect immediately, the Commission has 

included a post hoc 30-day comment period. 

I support the additional time that the 

Exemptive Order provides for market 

participants to comply with the 

Commission’s last-minute Guidance, but I 

cannot support a final order that blatantly 

ignores the APA-mandated comment periods 

for Commission action, especially when I 

advocated for a relief package that would 

have provided for public comment over a 

month ago.23

Additional Concerns 

In addition to the above, the Guidance 

leaves me concerned in a number of other 

areas. I am concerned about whether the 

definition of U.S. person contained herein 

provides the necessary clarity for market 

participants, particularly as its enumerated 

prongs are explicitly deemed to form a nonexhaustive list. I question whether the 

Commission has done enough to harmonize 

its cross-border approach with that of the 

Securities and Exchange Commission (which 

is being issued through notice-and-comment 

rulemaking instead of interpretive guidance, 

I should note), in particular with regard to 

the definitions of U.S. person and foreign 

branches. I also am concerned about whether 

the Guidance creates an uneven playing field 

for U.S. firms, which would be a plainly 

unacceptable outcome to me. I am concerned 

that the Guidance is overlapping, 

duplicative, and perhaps even contradictory 

with other provisions in the Dodd-Frank Act 

that mitigate systemic risk and allocate 

responsibility for administering its complex 

and comprehensive regulatory regime to 

multiple agencies under Title I, Title II, and 

even within Title VII.24 In addition, I am 

concerned that the Guidance practically 

ignores the hugely important matter of 

protecting customer funds, specifically in 

connection with bankruptcies, which has 

critical cross-border implications as vividly 

demonstrated by the recent collapse of MF 

Global.25 Finally, I am concerned about 

whether in overreaching to rope in entities 

into U.S. jurisdiction that would more 

appropriately be regulated elsewhere 

pursuant to an effective system of substituted 

compliance, the Guidance will have the 

perverse effect of creating more risk to the 

U.S. system and more risk to U.S. taxpayers. 

Conclusion 

For an administrative agency, good 

government combines good substance—based 

on a faithful, appropriate reading of the 

guiding statute—and good process. The 

Guidance falls woefully short on both counts. 

Therefore, I respectfully dissent from the 

decision of the Commission to approve the 

Guidance and Exemptive Order for 

publication in the Federal Register. 

[FR Doc. 2013–17958 Filed 7–25–13; 8:45 am] 

BILLING CODE 6351–01–P 

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